Do not kill the golden goose! Cautioning that India could lose out on the global offshoring pie if taxation practices are not corrected, industry and tax experts are pitching for introduction of safe harbour provisions in transfer pricing policies for captive BPOs in Budget-07.
Although Indias importance as the global offshoring hub is growing unabated, we must not forget there are competitors ready to grab a share of the offshoring pie. If over-zealous transfer pricing officers adopt margins as high as 25% for software services and 37% for ITeS, it may defeat the very purpose of offshoring and MNCs may be compelled to leave India for more competitive destinations, according to BSR & Co partner Sudhir Kapadia.
Nasscom president Kiran Karnik said business hated uncertainty and would prefer to operate in a regime which offered certainty on taxation.
With three years of assessment experience in transfer pricing, the time is ripe for introducing safe harbour provisions, BSR&Co said in a memorandum to the FM. In a sense, safe harbour provisions are akin to presumptive basis taxation, which is not foreign to the Indian I-T statute. E&Y partner Amitabh Singh favours advance pricing arrangements, which, he said, could help the situation to quite an extent.
A safe harbour provides circumstances in which a taxpayer can follow a simple set of rules under which transfer prices are automatically accepted by the tax authority.
Kapadia said Indias transfer pricing regulations are based on arithmetical mean standard. The firm suggested the inter-quartile range, a statistical measure which eliminates outlier companies those earning higher-than-normal profits or lower-than-normal profits.