“This is a positive development … it will reduce litigation, earn the government some taxes and allow MNC IT firms to buy peace”
Rules set to lessen tax tiff
The government today introduced new tax rules aimed at reducing litigation with multinational firms over cross-border transactions.
The new “safe harbour” rules aim to clarify transfer pricing, over which disputes have surged under a government drive for revenue to narrow a huge fiscal deficit and stave off a threatened ratings downgrade.
Revenue secretary Sumit Bose said the new rules would clarify the tax liability of companies. It will be applicable for five years beginning assessment year 2013-14.
Safe harbour prescribes the limit and conditions within which the price of cross-border transactions with a related company declared by an assessee is not questioned by tax authorities.
Multinationals trade with their arms in various countries across the globe at prices they have set, also known in accountancy parlance as transfer pricing.
However, very often the government questions the price they charge as being too low or too high and suspect this was done in order to transfer profits to countries where taxes are lower.
The questions raised by Indian tax authorities have led to a huge backlog of litigation without yielding much money to government coffers and yet causing bad blood with India’s booming software sector. Of nearly 8,000 such cases over transfer pricing, only 14 per cent have gone in the government’s favour.
“This is a positive development … it will reduce litigation, earn the government some taxes and allow MNC IT firms to buy peace,” said Mukesh Butani, managing partner with tax consultancy BMR Associates.
The new rules announced today said transactions up to a value of Rs 500 crore for software and ITeS firms will be accepted at face value on the premise that the profit margin on them will be 20 per cent. For transactions beyond Rs 500 crore, a “safe harbour” margin of 22 per cent has been fixed.
“This allows the large MNC IT firms that were left uncovered under the previous safe harbour rules to have a stable tax regime for any five years of their choosing … its in line with international best practices and encourages the IT and ITes sector, which has become our biggest forex earner,” said Bhutani.
For knowledge process outsourcing firms, their definition has been rationalised to provide reasonable distinction from routine business process outsourcing activity.