Finance Minister Arun Jaitley in his maiden Budget addressed transfer pricing woes of multinational companies by allowing rollback of Advance Pricing Agreements (APAs) to previous years. This will help resolve thousands of transfer pricing disputes and is a key element of reforms in the tax administration regime that Jaitley wants to achieve. The APA scheme, introduced in 2012, provides certainty to taxpayers by specifying in advance the arm's length price in cross-border transactions between related parties for next five years. The rollback would mean an APA for future transactions may also be applied to international transactions undertaken in the previous four years in specified circumstances. To align transfer pricing regulations in India with the best available practices, the finance minister has also proposed to introduce the "range concept" to determine arm's length price. Current rules allow only one year's data to be used for comparable analysis; the Budget proposed to amend the regulations to allow the use of multiple year data. One of the major steps in this Budget has been extending the advance ruling regime to domestic companies above a certain threshold. Earlier, the facility was available only for foreign companies. This is expected to address the proliferation of litigation in domestic taxes. Currently, tax demands of more than Rs 4 lakh crore are under dispute and litigation before various courts and appellate authorities. Jaitley also proposed to strengthen the Authority for Advance Rulings by constituting additional benches.
The scope of the Income Tax Settlement Commission will also be enlarged. The finance ministry also proposed to set up a high-level committee to interact with trade and industry on a regular basis to establish clarity in tax laws. The Budget also gave relief to the manufacturing sector by specifying that even where the product is being sold at a loss (below manufacturing cost plus profit) the excise duty would be applicable on such price (at which goods are sold) and not on a notional price as held in the Fiat case. "This is good news for the industry, particularly the auto sector, which was facing huge litigation after the Fiat decision a couple of years ago. However, this solves the problem prospectively. For the past period, industry will have to continue with the litigation," said Partik Jain, partner, KPMG. Tax proposals on the indirect taxes side are estimated to yield Rs 7,525 crore during 2014-15, while direct tax proposals, which raised the income tax exemption limit, will cause a net loss of Rs 22,200 crore. The finance minister retained the tax collection targets at the same level of the interim Budget presented in February. To boost domestic manufacture and to address the issue of inverted duties, the Budget reduced basic customs duty on certain items. To broaden the tax base in service tax, the Negative List for taxation of services is to be pruned. The free baggage allowance under the baggage rules was last revised in 2012. As a measure of passenger facilitation, the Budget increased the free baggage allowance from Rs 35,000 to Rs 45,000. Meanwhile, Jaitley also sought to push reform by accelerating the introduction of the long-delayed Goods and Services Tax (GST) to streamline local taxes for businesses and ensure higher revenue collection. "I do hope we are able to find a solution in the course of this year and approve the legislative scheme which enables the introduction of GST," Jaitley said. Revenue Secretary Shaktikanta Das said once issues related to entry tax and petroleum were sorted out the government would provide central sales tax compensation as the finance minister has already committed to states. He added it is not possible to roll out central GST first, as suggested by the Economic Survey. On the Direct Tax Code (DTC), Jaitley said the government would consider the comments received from stakeholders and review the DTC in its current shape and take a view in the whole matter. He dashed foreign investors' hopes by declining to roll back the 2012 retrospective amendments to tax laws, but sent strong signals that his government was committed to streamlining the tax administration.