The finance ministry will soon issue a clarification to distinguish between core and auxiliary/ancillary activities of companies outsourcing jobs to India.

Talking to Business Standard, Revenue Secretary Vineeta Rai admitted that the distinction between core and non-core activities needed to be drawn.

"It is confusing for the BPO industry. I have asked the chairman of the Central Board of Direct Taxes to issue a clarification citing what constitutes core and auxiliary/ ancillary activities," Rai said on the sidelines of a interactive session with Finance Minister Jaswant Singh organised by the Confederation of Indian Industry.

In the interim Budget 2004, Singh had said if the activities outsoured by foreign companies were ancillary and auxiliary in nature, and adequate remuneration was paid to the Indian firms, they would be exempt from tax in India.

However, this was merely a reiteration of a circular issued by the revenue department in January.

The circular said if a company outsourced any part of its core activity to India, it would be taxed in India.

But non-core business, including answering sales queries over telephone or even booking orders for goods and services to be delivered abroad, would not come into the tax net.

Clarifying the Budget announcement, a revenue department official said the idea was to exempt BPO companies that were enabling a foreign company perform to its core activity. If the BPO firm itself performed a part of the core business activity, it would be taxed, he said.

Transfer pricing experts, however, say the distinction between core and auxiliary/ancillary activities is thin.

There are grey areas when the government exempts telemarketing from tax but taxes the branch of a travel agency operating in India.