India is still holding out for safe harbour rules in 2013 budget

While safe harbour-enabling provisions were announced in India’s 2009 budget, the rules are yet to be published.

“A safe harbour mechanism would provide a measure of predictability as well as continuity for all participating organisations,” said a report from advisory firm, SKP. “It would eliminate the possibility of litigation between taxpayers and the income tax authorities. Further, it would reduce the administrative burden and ease compliance for taxpayers.”

“I do hope that the mystery around the safe harbour rates gets resolved in this budget. One does not need the budget to notify these rules but it may just be a good time to do it,” added Sanjiv Malhotra of BMR Advisors.

The delay in publishing the rules could be down to the difficulties in determining the rates.

“Finding the right safe harbour rates for various identified transactions is a very difficult process,” said Malhotra. “Going too aggressive (high rate) means having no takers for them and going too conservative (low rate) means leaving a lot of taxes on the table. It’s a difficult balance to make in an Indian scenario.”

Safe harbour is non-arm’s-length and should be used only for low value add transactions.

“In India, whether captive transactions – for example, BPO services or market support services – are low value-add or not is itself a debate and, hence, I don’t see how an agreeable safe harbour rate can be reached,” said Malhotra.

The wider wish-list

Guidance on valuation is also needed now the transfer pricing legislation has been expanded.

Share transfers, particularly between related parties – as with the recent dispute between Shell and the Indian authorities – are creating uncertainty regarding valuation.

“Guidance is required on the valuation of cross-border capital transactions such as subscriptions to capital, reorganisation, restructuring and share transfers, with such transactions now falling within the realm of transfer pricing according to the Finance Act 2012,” said the SKP report.

Increasingly, given the high-level of tax litigation in India, tax court rulings are becoming contradictory.

“Given the ever increasing quantum of transfer pricing disputes, it is essential that focus shifts from expanding the scope of regulations to clarifying the same,” said Malhotra. “This is also required as the jurisprudence emerging from the tax courts is to some extent contradictory. Thus, guidance notes on generic but contentious issues such as aggregation of transactions, management fees, intra-group services and economic adjustments may serve as an important tool to bring some level of certainty to taxpayers.”

Domestic transfer pricing

The domestic transfer pricing regime also needs to be considered in Thursday’s budget.

“The recently introduced provisions on domestic transfer pricing in practice will cast a huge compliance burden on taxpayers. Hence, the safe harbour limit should be enhanced from the current Rs50 million ($925,000) to Rs500 million,” said Malhotra. “Further, certain transactions such as managerial remuneration and director fees should be excluded from the scope.”


International Tax review will be hosting a web seminar on the Indian Budget on Thursday February 28 at 2pm GMT (7.30pm India time).

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