With the Finance Act bringing domestic transactions under the transfer pricing scanner, income tax revenue is expected to rise by Rs 3,000 crore in 2013-14, said tax authorities.
“We will start looking at domestic deals for the first time this financial year. We expect 50 per cent of domestic companies to be affected by this, increasing the revenue of the income tax department by Rs 3,000 crore,” said a Mumbai based senior income tax official.
Transfer pricing adjustments in 2007-08 stood at about Rs 1,600 crore, increasing to Rs 44,500 crore in 2011-12.
Earlier, transfer pricing was applicable on companies with cross-border operations. However, from this financial year, the finance minister has brought domestic firms and transactions into the net.
Transfer pricing is a principle based on which goods and services are priced.
In this process, open market rates are considered benchmarks for transactions between group companies across borders.
The move would impact companies that operate units in special economic zones (SEZs) and park the majority of their profits in these to avail the tax incentives applicable.
Real estate firms, which route transactions through hundreds of subsidiaries and associate companies, would also need to comply with the transfer pricing documentation and reporting norms.
Rohan K Phatarphekar, partner and national head (global transfer pricing services), KPMG, said, “The extending of transfer pricing provisions to specified domestic transactions will result in additional compliance burden on taxpayers and, in some cases, may actually be more onerous than cross-border transfer pricing. Given the enormous litigation in the transfer pricing space, taxpayers expect a similar fate in the assessments of specified domestic transactions in the future.”
The latest amendments have extended the concept of arm’s length pricing to these transactions.
The move was in line with a Supreme Court recommendation in the CIT-versus-Glaxo SmithKline Asia case, the Finance Bill said.
The Bill has amended the definition of international transactions and has been extended to include “specified domestic transactions” of Rs 5 crore and more.
Certain expenses, transfer of goods and services between related parties, extraordinary profits and profits earned by special economic zones would now be liable for scrutiny by transfer pricing officers.
The penalty for not complying has been made stringent, from Rs 1 lakh, irrespective of the size of to transaction, to two per cent of the deal.
N C Hegde, partner, Deloitte Hask-ins and Sells, said, “Many more dome-stic transactions will now come under the tax scanner."
He added transfer pricing was now sector-agnostic in nature.
“Due to this, all companies will have to maintain two balance sheets,” said an income tax officer.