Budget 2014: FM proposes to lower tax disputes, creating a conducive climate for investment

NEW DELHI: Vodafone hasn't got off the hook, but Finance Minister Arun Jaitely has vowed that the government will not bring about retrospective changes in taxes that would create any fresh liability, and that will comfort investors. His maiden Budget is dotted with proposals that will lower tax disputes, curb arbitrary tax demands and lend certainty to the tax outgo of companies, creating a conducive climate for investment.

Companies including the captive units of software multinationals will gain as they need to follow simpler rules in pricing their services when they do business with their parents or subsidiaries.

MNCs with captive units often complain that software development and back-office sectors face aggressive transfer-pricing audits despite their routine nature of work.

Transfer pricing refers to what related entities charge each other in cross-border transfers of goods and intangibles such as brands or services. These transactions are supposed to be priced according to an arm's length principle — what it would cost if the purchases were from a non-related party. But how this is determined is often a matter of dispute, with the unintended consequence of India coming across as a combative tax destination.

"The relaxation in the way arms-length price is computed will mean lesser tax disputes in future. Further, a rollback of the advance-pricing arrangements would help lower disputes on pending assessments," said Vijay Iyer, national leader, transfer pricing, at EY.

APA is an agreement between a taxpayer and the tax authority to compute transfer prices in advance for transactions within a group company.