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BW Businessworld

Muddying The Waters

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Budget 2012 will be remembered in the tax fraternity for a variety of reasons. Among others, it has brought numerous changes in transfer pricing provisions. While some of the changes have been fast forwarded from the proposed Direct Tax Code, others have sent shock waves. Key amendments include introduction of advance pricing agreements (APA), domestic transfer pricing provisions and defining the ever-controversial term "intangible". Also, the decision of the Dispute Resolution Panel can now be appealed by the tax officer and penalties for non-compliance have been made more stringent.
 
On a positive note, government has kept its promise to introduce APAs, which will enable taxpayers to seek clarity on their transfer prices. Under this scheme, taxpayers can agree with the government's (in advance) quantum of taxes / prices / margins on international transactions. For a country with a very high incidence of transfer pricing litigation, this is a welcome move. While this has been widely appreciated, we still have to wait for detailed guidelines to examine the independence of the authority. An earlier attempt at providing alternative avenues for cross-border dispute resolution (such as the Dispute Resolution Panel) had been severely criticised and hence we will prefer to wait and watch. International experience reveals success of APA programme as key to controlling litigation in this area with Australia and the US being notable examples.

A clarification provided in the budget is potentially damaging and would increase uncertainty for taxpayers. This relates to a very generic word "intangible" now defined in the transfer pricing regulations. With this definition, India joins a rather small group of countries with specific guidance on intangibles in the context of transfer pricing regulations. The Bill suggests that intangible is anything and everything that creates value. The definition includes traditional brands, processes, technology and the much-stretched items such as customer lists, open purchase orders and even employees. With such a wide ambit, it would be fair to assume that all businesses have overnight become owners of valuable intangible property. The fear is that most intra-group dealing will now be alleged to result in creation or transfer of intangibles. A retrospective amendment (from April 2002) on an issue that is currently being debated by the United Nations and OECD (Organisation for Economic Co-operation and Development) will open a can of worms. So it is fair to conclude that efforts to reduce transfer pricing litigation (through introduction of APAs) may be nullified
by the spate of controversies that would germinate on intangibles.

What is more worrying is that other amendments are focused on making good the government's loss of revenue due to unfavourable decisions given by courts and tribunals. The budget provisions undermine the status of courts and income tax tribunals.

Indian companies should get ready to face the impact of arm's length price on domestic transactions. With the changes proposed in the budget, transfer pricing compliance and litigation are no longer a pain only for MNCs or those engaging in cross-border transactions. This would add to the tax compliances of an already over-burdened
Indian taxpayer.

Looking at several proposed amendments, the message is very clear. The government wants to tighten its grip on multinationals and large domestic companies to extract every possible penny. With general elections due in 2014, the common man cannot be expected to fund the increasing fiscal deficit. An easy target is the taxpayer with deep pockets and, more importantly, one who does not vote.

India has consistently been ranked amongst the most difficult jurisdictions to do business in. Enactment of such draconian laws to fulfil the ambitions of an overzealous administration can further hamper our FDI prospects. With the global economy still struggling, every dollar invested in India is important. Add to this, the competition not just from Brazil, Russia, China and South Africa but also new jurisdictions such as the Philippines, eastern Europe etc.

For India to maintain (and increase) its global competitiveness, having just a demand-driven market is not enough. It needs to create a conducive environment for businesses to prosper. With the private sector spearheading employment generation in India, hurting it today would mean hurting the aam admi tomorrow.

(Mukesh Butani is chairman, BMR Advisors. The views are personal. With inputs from Sanjiv Malhotra, director)

(This story was published in Businessworld Issue Dated 02-04-2012)