Finance Ministry to clean-up trade transfer pricing norms to make doing business easy
NEW DELHI: India proposes a major clean-up of decade-and-a-halfold rules that govern the prices of imports by related parties – such as arms of multinationals from their parent – in an attempt to reduce delays and disputes and make it easier to do business.
The finance ministry is not just looking at changing the rules but also the process itself, which is riddled with delays and cumbersome paperwork.
“There is a need for a fresh look at these rules..A lot of water has flowed over 14 years,” a finance ministry official told ET.
With ‘ease of doing business’ the guiding principle, the government now proposes to make the process swifter and introduce an electronic interface. One option is to link valuations to audits, a procedure that’s considered more sound and thorough and followed internationally.
Transactions between related parties usually do not follow normal business dynamics in terms of pricing, making the role of tax authorities relevant. Tax law mandates that such transactions should be carried out on an armslength basis, just as an enterprise would with any other independent entity.
A dedicated unit, known as the Special Valuation Branch, is located at Customs houses in the metros for this purpose. This branch examines how the relationship between an importer and exporter has influenced the invoice value of imported goods. Terms and conditions of joint venture agreements and technical arrangements are also examined to see if they influenced the invoice value of imported goods.
Orders issued by a valuation branch are valid for three years, after which a follow-up reassessment is done. Although timelines are prescribed, the lack of capacity and reliance on paperwork usually lead to delays of as much as two or three years. In the intervening period, imports can be made by making an extra duty deposit of 1 per cent, which is refundable.
But a manual deposit and refund process makes this a very tedious task. Moreover, the rate of the extra duty can increase to 5 per cent if an importer fails to respond to a customs questionnaire in 30 days.
“The present special valuation branch process is fraught with inefficiencies and delay. Safeguards can be created using risk-based assessments and post-audit, as is in most international custom jurisdictions,” said Bipin Sapra, a partner at EY.
While batting in favour of switching to an audit to validate import prices, they also said valuation orders should hold good for more than three years.
“Rather than examining the import price at the time of imports, it would be better if it can be done at the time of onsite audit later… The renewal of special valuation branch’s order should be after five years,” said Pratik Jain, a partner at KPMG in India.
Jain pointed that though the extra duty deposit of 1 per cent has to be discontinued if an order is not issued within four months, in practice it is usually not done and added that this condition should be strictly enforced.
Align rules to avoid disputes
An overhaul of transfer price rules to lower disputes makes sense. Typically, a customs officer checks whether the value declared by the importer is underestimated to collect more duties. But the I-T officer checks whether value is overestimated to prevent shifting of profits outside India. The need is to bridge the gaps between the two authorities and ensure that crossborder deals between related parties are assessed properly.