TAXMAN TO MILK 80K CR FROM TRANSFER PRICING
NSUNDARESHA SUBRAMANIAN &SANTOSH TIWARI Mumbai/New Delhi, 17 November
The ghost of transfer pricing has returned this year to haunt multinational companies doing business in India and Indian companies with a big presence abroad. The cashstrapped government is looking at huge adjustment orders, running into a few billion dollars in some cases, as a way to improve the tax mop-up.
Two income tax department officials said the department was very aggressive on transfer pricing. “We have been told to collect as much as possible through demands raised on transfer pricing,” said one of the officials. The finance ministry wants to collect `5.85 lakh crore in direct taxes by March —30 per cent more than what it did last financial year. So far, it’s well short of the halfway mark, having collected `2.19 lakh crore till October.
Consultants estimate the taxman is planning to raise
`80,000 crore from transfer pricing adjustment orders to make good on its direct tax shortfall for the financial year.
Transfer pricing refers to the adjustment of charges between related parties for goods, services or use of property. It is a recent phenomenon and an emerging area of taxation globally. It was brought into existence by the emergence of multinationals, which have led to billions of dollars moving across countries within a single company.
Companies and advisors are, however, not in the mood to put up the money without getting into lengthy litigation.
“They are finding new ways to raise claims. The numbers are ballooning. This is only going to result in disputes clogging the litigation channels,” said Sudhir Kapadia, partner and national tax leader, Ernst and Young Pvt Ltd.
3GSPL, a Vodafone group firm, has already said it will dispute a `8,500 crore adjustment order passed by the department recently. Global technology and telecom majors, consumer goods multinationals and foreign banks with support facilities in India are prime targets for these transfer pricing orders. One of the major sources of claims this year is lending to group firms, officials say. The tax department has raised tax demands on a host of companies for charging belowmarket interest rates on lending to subsidiaries.
According to officials, the I-T department has put a floor of 16 per cent interest rate for domestic lending here, and the difference of any rate below it (for example, if the lending to asubsidiary has been at 13 per cent, this will be 16 minus 13 i.e. three per cent) will be computed as income and, therefore, be liable for tax.
According to Kapadia, when the lending is made to an entity abroad, it has to be benchmarked with international rates, which are much lower. “How can you benchmark international lending with domestic rates? That is the economic argument here,” he said.
He added efforts for the recovery of transfer pricing tax dues from the companies were expected to intensify from December. The department has been tightening its noose around transfer pricing by making changes in the provisions in the past few years.
Turn to Page 16
Companies gear up for legal battle as govt makes a dash for cash
KEY DISPUTE AREAS
IT/telecom
Margins of captive, R&D facilities
Pharma
Intellectual property rights, supply chain
Banks
Support facilities/ BPO operations
FMCG
Royalty payments and advertising spends on global brands
Others
Pricing of imports, cross-border lending, corporate guarantees GRAPHIC: NEERAJ TIWARI
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Transfer pricing ...
Section 92CA of the Income Tax Act provides the Transfer Pricing Officer (TPO) can determine the arms length price (ALP) in relation to an international transaction, which has been referred to the TPO by the assessing officer. The law also empowers officials to conduct an inquiry or investigation while determining pricing and even raise further claims on issues that may come up during such a process.
While this has led to an increase in claims, it also has created a situation where different I-T field formations are using different figures to raise tax demands on companies.
A senior Central Board of Direct Taxes official, however, said, “More references would have come on transfer pricing from the assessing officers this year and that is why more notices have been going to companies. Notices are directly proportional to the references on transfer pricing tax dues calculations.” Experts say ambiguity in the provisions is leading to unreasonable demands and lengthy disputes.
Arun Jethmalani, managing director, Valuenotes Database Pvt Ltd, said, “Laws for transfer pricing are ambiguous and subjective. There are no set criteria for various costs. In such a situation, any time the government can say I don’t agree with your treatment. And when the government needs money, it will do it.” Officials say this is a vicious cycle created by the stress on tax collections due to the huge refunds issued this year. “Even if a substantial recovery is made on these demands this year, they would be rejected in the appeal. That will lead to refunds,” he explained. Jethmalani points out even companies that consciously want to keep away from trouble can’t do it. “Companies spend a lot and appoint big consulting firms. But, even they get into trouble because there is no consistency,” he said.
Kapadia of Ernst & Young pointed out the government had proposed an Advance Pricing Authority to help companies know the tax treatment of their transactions in advance. “It is high time we implemented the Budget recommendations. Companies can get into advance pricing agreements and avoid several hundred rulings going into disputes. That is the need of the hour.” According to a recent survey by E&Y on transfer pricing, the level of satisfaction with such advance pricing agreements as a controversy management tool is high — 90 per cent of those who have used them would do so again.
FROM PAGE 1
‘Pranab approved decision to set aside NSDL order’
NSUNDARESHA SUBRAMANIAN Mumbai, 17 November
FINANCE minister Pranab Mukherjee had approved the controversial decision taken by the Securities and Exchange Board of India (Sebi) to set aside a committee order on the National Securities Depository (NSDL) issue, say sources.
“The decision was approved by Mukherjee on the file put up to him prior to the board meeting,” said an official who was present at the said meeting. After C B Bhave took over as Sebi chairman in 2008, a panel constituting then part-time members Mohan Gopal and V Leeladhar was formed to investigate and adjudicate pending matters in the NSDL case. Bhave, who had headed NSDL till then, had formally recused himself from the matter.
The panel passed two critical orders on the matter, which were declared “null and void” by Sebi. The entire issue has been energised since there is a court challenge on appointment of Bhave’s successor and related matters.
The financial ministry’s response to the suit cites the controversy surrounding the NSDL case as the key reason for not granting an extension to Bhave. The suit alleges irregularities in not granting an extension. In a media interview, Gopal had accused the then board of pressurising him to reverse the order. However, speaking under cover of anonymity, senior officials said his committee took extraordinary interest in the NSDL matter and acted in a preconceived manner. “The committee members seemed to have made up its mind about what they wanted to write.” Officials said the committee had given new life to a sentence from an earlier order, which was deleted by the Securities Appellate Tribunal.
“There was a sentence in the earlier Sebi order on fixing professional and management and individual liability on the management of NSDL in the order by Anantharaman.
LIFE INSURANCE PREMIUM
GOVT’S THREE-WAY STRATEGY TO BOOST COLLECTION
NILADRI BHATTACHARYA Mumbai, 17 November
The finance ministry has prescribed a three-pronged strategy to arrest the slide in premium growth in the life insurance sector. This follows the industry asking the government to revive the sector, as business growth saw a decline since new regulations on unit linked plans were introduced in September 2010.
Sources said the finance ministry had identified the impasse surrounding pension plans as the main reason behind dwindling sales. The challenging economic scenario, high interest rates and a choppy equity market added to the woes. During the first six months of the current financial year, life insurance sales were down 22 per cent, while the number of policies issued by these companies declined 17 per cent.
The finance ministry has prescribes three measures: First, allowing more options to customers in terms of pension plans, without any guarantee. Second, erstwhile popular unitlinked plans may be revived, but under a different product category and third, relaxing debt investment norms by allowing insurance companies to invest outside AAA rated papers.
The move assumes importance, considering the Insurance Bill is still pending in Parliament. The Bill seeks to raise the foreign direct investment limit for the insurance sector from 26 per cent to 49 per cent.
"We have conveyed our deliberations on the current health of the industry to the ministry. It has assured us it would will look into the matter,” S B Mathur, secretary, Life Insurance Council, the representative body for the life insurance industry, told Business Standard .He added the primary reason behind the decline in industry sales was pension plans, which had no takers at the moment.
According to data collected by Life Insurance Council, premiums collected from pension plans stood at `600 crore in the first six months of 2011-12, compared with `18,000 crore in 2010-11. This was mainly due to the new regulations on pension products, mandating a minimum annual guarantee of 4.5 per cent, which came into effect in September 2010.
The industry failed to recover, even though the Insurance Regulatory and Development Authority (Irda) dropped the 4.5 per cent minimum guarantee clause from such products. To revive the sector, the government has asked Irda to consider allowing more choices to customers, and these may include products without guarantees. “The current guideline restricts investments in equities, as there is a guarantee element. So, young customers who can afford to take risks are shying away from the product. So, there must be some options,” said a source.
The regulator may also allow erstwhile popular unitlinked pension products, albeit under a different category. “Pension plans sold earlier did not fit the definition of pension. However, these products, which were accumulative in nature, can be treated as a different category,” Irda Chairman, J Hari Narayan, said at a recent industry seminar.
Another concern for the ministry is the decline in equity and debt inflows from insurance companies. Equity inflows fell, as the sales mix shifted in favour of traditional policies. Unlike unit-linked products, in which up to 95 per cent of the funds can be deployed in equity, traditional plans cap equity exposure at 25 per cent. After the new guidelines came into effect, the mix between unit-linked and traditional policies, which was earlier 80:20, reversed.
With more money to be invested in debt, insurance companies are also tied down by the regulation that mandates that 75 per cent of its debt investments be in AAA rated papers. Hence, the government has prescribed a relaxation in this norm, allowing investments in lower rated papers. “There are alot of good companies which have AA+, AA, AA- and A+ rated issues and these can be safe options for insurance companies,” said a source.
Prescription
Allowing more options to customers in terms of pension plans, without any guarantee
Erstwhile popular Ulip pension plans would come in New Avtar
Tweaking debt investment norms by allowing insurance firms to invest outside AAA rated papers
Concerns
New premium collection down 22% in 2011-12
No of policies issued down 17% in 2011-12
Collection under pension plan down to `600 crore
Ulips accounting for only 18% of the total sales
SNAPSHOT
FII CAPS ON G-SEC, CORPORATE BONDS UP
BS REPORTER New Delhi, 17 November
The finance ministry today decided to increase the investment limit for foreign institutional investors (FIIs) in government securities and corporate bonds by $5 billion each. FIIs would be able to invest up to $15 billion in government securities, compared with the current $10 billion ( `43,650 crore), and up to $20 billion ( `74,416 crore) in corporate bonds, compared with the current $15 billion.
“The incremental limit of $5 billion can be invested in securities without any residual maturity criterion,” the ministry said in an official statement. The Securities and Exchange Board of India is expected to issue a circular that would bring into effect these changes in the next few days.
As on October 31, against a ceiling of `43, 650 crore in government securities, FIIs had invested `41,253 crore, while against a cap of `74,416 crore in corporate bonds, FIIs had invested
`68,289 crore. “In view of this, there is little space available for further FII investments in government securities and corporate bond markets. The policy has been reviewed in the context of India’s evolving macroeconomic situation, the need for enhancing capital flows and making available additional financial resources for India’s corporate sector,” the ministry said.
The last enhancement in these investment limits for FIIs was carried out on September 23, 2010. The ministry hopes these enhancements would increase investments in debt securities and help further develop the government securities and the corporate bond markets in the country. Officials said the ministrys next focus would be allowing qualified foreign investors in equity.
Apart from government securities and corporate bonds, there is a limit of $25 billion ( `112,095 crore) for FIIs investing in long-term infrastructure bonds. In the wake of subdued response from FIIs for investment in such bonds, the finance ministry had recently eased the norms for investing in the scheme and had reduced the residual maturity limit and the lockin period for investment in such bonds.
Among other recent key decisions, the ministry had allowed high net worth individuals to invest in infra debt funds, said infrastructure finance companies were eligible issuers for FIIs debt limit for infrastructure and allowed the refinance of buyers/suppliers credit through extra commercial borrowings (ECBs). It had also permitted interest during construction under ECBs, allowed availing of ECBs denominated in rupee (since the borrower was insulated from the exchange rate risk) and given clarity on equity definition for ECBs from foreign equity holders.
With interest rates in the country ruling high, the finance ministry had also allowed Indian companies to raise cheaper funds abroad to refinance their rupee loans. It had also said Chinas renminbi was an acceptable currency under ECBs with aceiling of $1 billion.
AFTER THE NEW NORMS COME INTO EFFECT,
FIIs would be able to invest up to $15 billion in government securities, and up to $20 billion in corporate bonds
CLAIMING HRA? GET THE HOUSE OWNER’S PAN
due date, may
NEHA PANDEY
Kalpana Sinha, a tenant in a Mumbai suburb, often tells her house owner that her payment of rentals —
`30,000 a month — do not allow her to claim tax benefits. While the owner is willing to give her atemporary receipt, it contains little detail about the owner.
Sinha would be relieved at the latest circular from the Central Board of Direct taxes, which says that rentals of more than `1.8 lakh a year need to have proper documentation, with the owners permanent account number (PAN).
Similarly, many chartered accountant advise clients that they can claim house rent allowance (HRA) even if staying in their parents or spouses flat. That is, they can pay the rent to their spouse or parents and claim the same. And, often, parents or spouse (especially, if she is a housewife) do not have a PAN. Sometimes, when both are working, they pay rents to each other.
Such people now need to be more careful. Payment of HRA can be traced through their spouse or parents PAN numbers. As a result, taxes will have to be paid on such rentals by the recipient.
Amitabh Singh, tax partner at Ernst & Young, explains, "There are many who show they pay rent to their family member and claim HRA benefits. The employee may be doing this only to get HRA and the family member may not be reporting the rental income." This is mostly practised where the HRA in question is a big amount. Hence, the tax authorities have kept a threshold of `1.8 lakh or rent of `15,000 amonth.
In case the house owner does not have a PAN, a declaration to this effect from him/her, with name and address, should be filed by the tenant-employee, it further says. It should be signed by the landlord, with a valid identity proof such as passport details, ration card or voters card. A copy of the declaration format should be given to the tenant.
Since the circulars introduction in August, tax consultants say they have started advising clients to obtain the PAN of the house owner. They say if this is not furnished before the due dates for filing proofs on tax-saving investments, that is, before February 2012, the HRA benefits may be withdrawn, because there are no alternatives provided in the circular if the woners PAN/declaration is not available. And, the additional tax liability for 2011-12 may be recovered between January and March 2012.
However, the circular is silent on whether the employees HRA can be honoured in the absence of such documentation. "Because, the law or the Income Tax Act does not prohibit anyone from getting HRA benefits in the absence of landlords details," says Kaushik Mukherjee, ED (tax & regulatory practices), PricewaterhouseCoopers. Section 10 (13A) on HRA benefits does not have any clause where the claim will not be honoured if the house owners details are not attached by the tenant or HRA claimant.
Experts say as long as you can provide details like the rent receipt or rent agreement, there should not be any problem. And, rent agreements are supposed to also have the house owners PAN details. "The problem gets solved if you pay the rent online or through cheques. You can also show your bank account statements. These are good enough proofs and you cannot be denied your claim," says Homi Mistry, tax partner at Deloitte, Haskins and Sells.
A LOOK AT THE RULES
CBDT circular says rentals of over `1.8 lakh a year need the owner’s PAN
Those paying rent to parents’ or spouse’s flat will need to show PAN
Owner needs to give declaration in absence of PAN
HRA payment can be traced through owner’s PAN
Cash rentals mostly practised when HRA is huge, hence the threshold of `1.8 lakh
Owner’s PAN, if not furnished before result in HRA benefits being withdrawn
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