New tax rules will cut litigation in IT: Experts

BANGALORE: IT sector analysts, taxation experts and IT industry body Nasscom welcomed the PM's move to set up a panel to clarify taxation policies related to the sector, saying a taxation regime in line with the best international practices would boost investor confidence.

With many litigations emerging from the complex tax regime related to transfer pricing (TP), "safe harbour provisions" were announced in the Finance Bill in 2010 that was aimed at resolving disputes and provide certainty to the taxpayer . But it has not been operationalized , though the Central Board of Direct Taxes (CBDT) has finalized the framework for safe harbour provisions.

Safe harbour provisions benefit both the taxpayers and the tax authorities in determining the transfer price of international transactions. A safe harbour means "circumstances" in which the transfer pricing declared by the assessee shall be accepted by the revenue authorities without much scrutiny. It provides the taxpayers with much needed certainty, relief from compliances and associated costs, while tax authorities will be relieved of much of their administrative burden.
Mudigonda Vishweshwar, senior director in Deloitte India , said, "This can bring in much needed litigation relief to the taxpayers facing aggressive transfer pricing audits in India. This is a positive move that increases the confidence of foreign companies in setting up or expanding their operations in India."

"In fact, the safe harbour regulations proposed by the industry did not see much traction and it is important that India comes out with a clear position on the safe harbour rules and make it attractive for companies to come under the regime rather than litigate with the tax authorities," K R Girish, head of tax disputes resolution, KPMG, said.

Many MNCs carry out activities such as product development , analytical work, and software development through captive entities in India. Over 750 MNCs have such centres in India. Safe harbour rules specify a transfer pricing margin for transactions that are repetitive in nature and where India is used as a development centre by the foreign parent company. "Currently tax authorities have an aggressive approach with regard to transfer pricing margins, comparing these development centers with a fully fledged company having all associated risks," Girish said. "What brings a captive centre under transfer pricing—is it based on the number of employees it has or its revenue or any other parameter, we have no idea as of now. Bringing in more clarity and removing the ambiguity will improve the investment climate for the Indian IT sector," said Ravi Mahajan , partner (taxation) in Ernst & Young.

Pallavi Singhal, associate director , tax and regulatory service at PwC, noted that there was a mismatch between the high margins ascribed by the tax department and the markups that development centres show. "That is being sought to be reconciled," she said.