As it tries to project an image of stable and investment friendly tax policies,the finance ministry has eased safe harbour norms and will provide clarity in transfer pricing to multi-national companies operating in the country.
The final guidelines that were notified on Wednesday have made the regime applicable for five assessment years starting from 2013-14 and has also increased the transaction limit for IT and ITeS firms to Rs 500 crore.
Safe harbour refers to the circumstances under which the tax department will accept the transfer price declared by the assessees. The norms that are in the nature of presumptive taxation are applicable to six sectors including IT,ITeS,contract R&D in IT and pharmaceuticals,corporate guarantees,outbound loans and auto ancillaries. Increasing the applicability of rules to five years will provide greater certainty to assessees while a high transaction limit will allow larger companies to avail these rules as well, said revenue secretary Sumit Bose adding that modifications have been made based on public feedback.
But tax experts do not see much relaxation in the revised rules except for in the case of KPOs whose definition has also been rationalised to provide distinction from the routine business process outsourcing activity. The safe harbour operating margin has been lowered to 25 per cent from the earlier 30 per cent and ceiling for KPO transactions has been removed. Larger captive players in IT & ITeS and also captive players in KPO and contract R&D might still not find the revised safe harbour rates lucrative enough to opt for it due to economic double taxation as the safe harbour rules in India are unilateral and not bilateral, said Rahul Mitra,leader,transfer pricing,PricewaterhouseCoopers,India.
The norms were long pending as they were originally proposed in the Finance Act 2009 but were never notified. The Prime Ministers Office had last year set up a committee under N Rangachary on transfer pricing and safe harbour issues. The Central Board of Direct Taxes had on August 14 this year issued the draft guidelines on safe harbour that sought to make the rules applicable for a period of two years only and had capped the transaction at Rs 100 crore.
Now,transactions up to Rs 500 crore have been provided safe harbour margin of 20 per cent and above Rs 500 crore have been provided margin of 22 per cent. For wholly owned subsidiaries,transactions about Rs 100 crore can avail safe harbour rules only if it has been rated as adequate to highest safety by a rating agency registered with Sebi. But the margin for such transactions above Rs 100 crore has been reduced to 1.75 per cent of the amount guaranteed.