The Indian BPO industry has been rattled by the service tax department asking leading companies including Convergys, Genpact and Vertex to return refunds paid to them on claims made before March 2007.

The contention laid down by the department is that services provided by BPO units to clients located outside India do not amount to export as these are “delivered in India”, says a report published in the Economic Times.

An amendment made in the export of service rules in 2006 states that BPO services amounted to ‘export’, only if the recipient was located outside India, the service was delivered and used outside India and the payment was received by the service provider in convertible foreign exchange. The second condition of delivery and usage outside India was replaced in 2007 with service provided from India and used outside India.

Since the BPO services provided to overseas clients amount to exports, BPO firms are permitted to file either a refund claim or rebate claim of service tax paid on input services and duty paid on inputs used in provision of BPO services.

This is not the first time that ambiguity in the export of service rules has come up said the report. An analyst from E&Y was quoted as saying that by denying refunds, BPOs in India would be rendered uncompetitive in an already difficult economic situation.