India

Market overview

Indian transfer pricing regulations have been heavily affected by the changing global tax and transfer pricing environment prompted by the OECD's BEPS Project.

India has been one of the strongest supporters of the BEPS project, quickly adopting many BEPS measures despite not being an OECD member country. India adopted BEPS Action 13 to introduce the master file, local file and country-by-country reporting (CbCR) into its local legislation from April 1 2016. It further signed the multilateral competent authority agreement for the automatic exchange of CbCR.

"There is heightened early-stage anxiety on the part of companies that will be required to comply with CbCR, as the extensive nature of reporting and the implications from a BEPS-risk assessment standpoint has dawned on them," said Gokul Chaudhri, head of direct tax at BMR Advisors, Taxand India.

On the other hand, Amit Maheshwari of Ashok Maheshwary & Associates viewed India's moves towards aligning with the international tax standards as a positive for foreign investors. "The introduction of range concept in place of arithmetic mean has been proven to be another step in alignment of the Indian regulations with the international laws which has gained more confidence of foreign investors in the Indian economy," he said.

Another trend identified in the Indian transfer pricing market is that a number of advance pricing agreements (APAs) have been favourably adopted by companies and the Indian tax authorities.

"In the recent years, transfer pricing has been one of the most litigated issues before the judicial authorities. However, the government, in line with its efforts to cut the amount of litigations in the country, has tried to provide a little bit more stability to it. Consequently, the quantum of litigation has been reduced considerably," said Maheshwari.

Indian companies and the government are actively closing APA files, with more than 711 APA applications filed as of March 2016. Of these applications, 80 were bilateral.

"The number of APAs filed, unilateral as well as bilateral, has increased exponentially. The rollback mechanism in the APA programme has given a breather to many multinationals. This shows that APA is being seen as a successful dispute resolution mechanism," said Dinesh Kanabar, CEO of Dhruva Advisors.

Further, the government has changed its guidelines, leading to the tax authorities targeting audits with a focus on a risk-based selection rather than the former value-based method. The number of cases assigned to each transfer pricing officer has also been reduced from 70 to 50 to improve handling of complex and critical cases.

There has been a significant debate on several adjustments made by transfer pricing authorities in the past year, particularly on marketing intangibles, like advertising and marketing promotion (AMP) spends. "Another pain point for many corporates was the additions on account of alleged excessive expenditure on AMP. Recently, the Supreme Court has admitted a special leave petition on AMP matter. In the time to come, we expect the Apex court to decide the matter and put to rest the issue by providing clarity on this matter," said Kanabar.


Tax authorities

Department of Revenue, Ministry of Finance
Room No 46, North Block
New Delhi, 110001
Tel: +91 11 2309 4595
Email: jsrev@nic.in
Website: www.dor.gov.in


Tax rates at a glance

(As of January 1 2016)

Domestic company income tax rate 30% (a)
Capital gains tax rate 20% (a)
Branch tax rate 40% (a)
 
Withholding tax
Dividends n.a.
Interest
Paid to domestic companies 10% (b)(c)
Paid to foreign companies 20% (a)(b)(c)(d)(e)
Royalties from patents, know-how etc 10% (a)(b)(e)(f)
Technical services fees 10% (a)(b)(e)(f)
Branch remittance tax n.a.
 
Net operating losses (years)
Carrybacks 0
Carryforwards 8 (i)

  1. The rates are subject to an additional levy consisting of a surcharge and a cess. They are increased by the following surcharges on such taxes:
    • Domestic companies with net income exceeding INR100 million: 12%
    • Foreign companies with net income exceeding INR100 million: 5%
    • Domestic companies with net income exceeding INR10 million: 7%
    • Foreign companies with net income exceeding INR10 million: 2%
    No surcharge is payable if the net income does not exceed INR10 million. The tax payable (inclusive of the surcharge, as applicable) is further increased by a cess levied at 3% of the tax payable. The withholding tax rates are increased by a surcharge for payments exceeding INR10 million made to foreign companies and a cess (see above).
  2. A Permanent Account Number (PAN) is a unique identity number assigned to a taxpayer in India on registration with the India tax authorities. If an income recipient fails to furnish its PAN, tax must be withheld at the higher of the rate specified in the relevant provision of the Income Tax Act and 20%.
  3. Interest paid by business trusts is subject to a withholding tax at a rate of 10% for payments to residents and 5% for payments to non-residents (including foreign companies) plus applicable surcharge and cess.
  4. This rate applies to interest on monies borrowed, or debts incurred, in foreign currency. Withholding tax at a rate of 5% (plus a surcharge of 2% or 5%, as applicable, and a 3% cess) is imposed on interest payments to non-residents (including foreign companies) with respect to the following:
    • Infrastructure debt funds
    • Borrowings made by an Indian company in foreign currency by way of loans between July 1 2012 and July 1 2017, infrastructure bonds issued between July 1 2012 and July 1 2017 or long-term bonds issued between October 1 2014 and July 1 2017, subject to prescribed conditions
    • Rupee-denominated bonds of an Indian company or a government security issued to a foreign institutional investor or a qualified foreign investor, with respect to interest payable between June 1 2013 and June 1 2017
    • Interest received from units of business trusts in India
    Other interest is taxed at a rate of 40% (plus the surcharge of 2% or 5%, as applicable, and the 3% cess).
  5. If a recipient of income is located in a Notified Jurisdictional Area (NJA), tax must be withheld at the higher of the rate specified in the relevant provision of the Income Tax Act and 30%. Cyprus has been notified as an NJA.
  6. The 10% rate (plus the 2% or 5% surcharge, as applicable, and the 3% cess) applies to royalties and technical services fees paid to foreign companies by Indian enterprises. However, if the royalties or technical services fees paid under the agreement are effectively connected to a permanent establishment or fixed place of the non-resident recipient in India, the payments are taxed on a net income basis at a rate of 40% (plus the 2% or 5% surcharge, as applicable, and the 3% cess).
  7. Unabsorbed depreciation may be carried forward indefinitely to offset taxable profits in subsequent years.

Source: EY 2016 Worldwide Corporate Tax Guide


Firm contact details

Ashok Maheshwary & Associates
Dhruva Advisors
Nangia & Co