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Transfer pricing rules help Income -Tax dept
October, 12th 2009

Transfer pricing (TP) rules that were put in place by the government in the 2001-02 Budget has helped the countrys direct tax regime to earn an additional Rs 15,000 crore to date, according to figures available with the Income-Tax department.

Ever since the first assessment under the TP rules were made in 2003-04, the revenue realised through it has been on the ascent, rising at a rate of 20-25% every year. It is also expected to go up this fiscal, in view of the new Dispute Resolution Panel of collegium of commissioners, which will look into all the TP assessments.

The collegium of commissioners, comprising three commissioners, are appointed to pass a decision on the demands made by the TP officer. This order is binding on the I-T department. This system eliminates delay in realising the tax demand, and therefore, the department expects the tax via TP rules to increase substantially this year.

The TP rules, like in many other countries, were introduced in India with the objective of checking the possibility of revenue leakage in cross-border transactions between related parties. This is a major tool in the hands of the tax department to identify adjustments in transactions between related parties who are said to cover up the actual transaction value.

Those tracking the issue said there is a visible tendency among certain MNCs to park their profits in countries where the tax rate is low by inflating their transactions in such countries. Simultaneously, they also under-report the income generated from countries where the tax rate is high.

Over 60% of the global transactions are between related parties. Therefore, most developed countries have already put in place their own TP rules, especially the member countries of the Organisation for Economic Co-operation Development (OECD). However, there has been an increasing demand from African governments to legislate their own TP rules to manage issues related to taxing cross-border transactions.

According to estimates made by independent economists, about $800 billion escape tax net in these countries annually. This is on account of having no system to scrutinise related-party transactions. Normally, this is a huge burden on these countries, if one takes into account the size of their GDP, which is often less than the turnover of the MNCs that operate there.

 
 
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