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Companies worried about transfer pricing, says KPMG survey
December, 02nd 2011

India's bureaucratic tax system, more than tax rate, impacts investment decisions by foreign companies planning to set shop in the country. Unclear tax policies coupled with lengthy filing processes have made the country's tax regime moderately conducive for business, according to a survey conducted by professional services firm KPMG.

Of the various tax issues that respondents were queried on, transfer pricing emerged as the most important challenge faced by taxpayers, as various companies raised concerns over the way the norms in this segment of taxation are administered.

More than 67% of the respondents - the firm spoke to about 160 finance heads of various companies - identified transfer pricing as a major hurdle in taking decisions, as it nearly doubled the amount of tax a company paid. Transfer pricing is the amount used in accounting for transfer of goods and services from one company to another.

"The survey actually cleared the air on quite a few issues including the perception of corporates on actual tax rates," said Dinesh Kanabar, deputy CEO and chairman-tax, at KPMG.

"Until now, we knew that actual tax was much higher than the effective rate of tax due to tax holidays and incentives. Now, the pendulum has swung the other way. Effective tax rate, which is what corporates pay to government, is much higher than the actual levy," he said.

Higher tax outgo typically happens when tax authorities make varying interpretations of the quantum of tax a company should pay on transactions, including that between an Indian parent and a foreign subsidiary. Faced with dwindling revenue, tax authorities in India have been bunching up newer transactions under transfer pricing to shore up collections and improve fund generation for the government.

Recently, the tax department shifted its focus on corporate guarantees issued by large Indian business houses to overseas subsidiaries and assessed the guarantee as another income head for the Indian parent to raise higher tax demand. The tax department, which raised Rs 20,000 crore last year from transfer pricing transactions, is aiming to generate at least 50% more in the current fiscal year and has included expenditure on brand building as another new aspect to levy tax.

"We have brought corporate guarantees under the transfer pricing net of the Income-Tax Act," RN Dash, director-general (transfer pricing), told ET in an earlier interview. "We have identified a number of intangible transactions and corporate guarantee given to associated enterprises for acquiring companies abroad is one of them."

The survey found that income tax and service tax came second and third in the list of concerns, with the respondents saying that more than 55% of the finance heads found the tax system as moderately conducive to growth.

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