India has been aggressively imposing tax claims on the transactions carried out by multinational firms in the country in an effort to reign in the budget deficit experiences currently. Back office functions and IT have been particularly targeted by the government in this respect.
Authorities are taking a microscopic view of transactions of minimum value Rs. 250 million. They have already finished laying claims till March 2009 and have already begun focusing on 2009-10 fiscal year.
Transfer pricing and tax regulations in India
Transfer pricing is basically the transaction value of assets, products and services between the different units of companies across borders. This is a regular routine in the business of any multinational company. The authorities in several countries such as France, USA, Germany and Britain have been trying to minimize the efforts of the companies to decrease the tax liabilities incurred by them.
The companies are trying to minimize the liabilities by the movement of taxable income to lower tax jurisdictions to higher tax ones.
The aggressive tax policy being undertaken by India may affect foreign investment. However, officials state that these efforts are under way so as to compensate for revenue shortfall as well as remove the threat of credit rating downgrade.
According to a survey conducted by Ernst & Young in August 2012, there were more than 1,500 disputes regarding transfer pricing whereas USA had fewer than six and Taiwan and Singapore had none, by February 2011. However the BRIC (Brazil, Russia, India and China) countries are stricter about tax avoidance when compared to developed countries.
Transfer pricing disputes in India
The documents available at the appellate tribunal of the tax department show that there are several multinational companies involved in transfer pricing disputes in the country. Some of these companies are Anglo-Dutch oil company Royal Dutch Shell, South Korean company LG Electronics Inc., French IT services group Capgemini, chocolate manufacturer Cadbury, British mobile phone company Vodafone Group Plc and Singapore property firm Ascendas. Many of these companies have also challenged the orders of the tax department.
Tax department expects the IT and BPO industry to account for over half of the total number of transfer pricing tax claims for the year 2008-09. This is a rise from one-third of the claims in the fiscal year previous to this one. The tax department of India believes that the firms in this sector are utilizing the low costs in the country in order to develop patented, high-end products and services.
The officials state that these products and services are then sent to the parent firms abroad tagged as routine work of low value. On the other hand, a NASSCOM spokeswoman said that the tax department has been making aggressive and inconsistent adjustments when it comes to IT and BPO sector.
According to KPMG, the average tax rate in the corporate sector in Asia is 22.89% and 20.49% in Europe. Compared to this, India levies a gigantic tax rate of 32.45%.
Since the value of an internal transaction is based on opinion as well as assumptions about future growth of a company, both the tax department and the company can arrive at entirely divergent views about the value of such a transaction. This has been the basic reason for most of the transfer pricing disputes in the country.