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Heated debate in India over transfer pricing

A key challenge facing companies in India is the litigation over transfer pricing.

India’s government and foreign companies doing business in the country are debating whether business conducted between two companies belonging to the same parent is artificially mispriced for the purpose of lowering their tax bills.

The deputy head of accounting firm KPMG in India, Dinesh Kanabar, argued in July that the problem had become “rampant,” citing estimates that 70 percent of all cases occur domestically despite India accounting for less than 2 percent of global trade.

Much of the fault lies in the government’s attempts to shore up its tax base and fund a fiscal deficit exacerbated by wasteful fuel subsidies, estimated at last count to be the fourth largest in the world.

In a landmark case that sent shockwaves through the business community, India’s government altered its tax code in 2012 with retroactive effect in order to circumvent a Supreme Court ruling weeks earlier that barred it from demanding roughly €1.8 billion in back taxes from Vodafone. As a result, India fell three rungs to 134th out of 189 countries in terms of ease of doing business according to the most recent World Bank annual rankings while Transparency International deems India more corrupt than Liberia.

Recent signals from the newly installed cabinet under Prime Minister Narendra Modi of the Hindu nationalist party BJP have been promising, however. Not only does the government pledge it will invest about €6.5 billion to build more roads and highways, double the amount earmarked in last year’s budget, but it also plans to simplify taxes and adopt an industry proposal on transfer pricing. Although the business community was disappointed that no effort was made to change the so-called “retro tax” that blindsided Vodafone two years ago, Finance Minister Arun Jaitley has indicated the new government would refrain from fresh levies on past transactions.