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In recent months, the income tax department has made adjustments worth $10 billion in transfer pricing cases and plans to send tax demands by March-end. It is widely felt transfer pricing adjustments have led to increased costs of doing business in India.
"This act of the government to stay away from such controversial issues could either mean that they do not believe that the recent adjustments around transfer pricing truly hold complete merit and may get appropriately rectified through the legal process, or it could be in a phase to understand the core changes required to bring certainty in areas around valuation of intangibles or share transactions including their taxability aspect. However, from the taxpayer perspective, it has not assuaged investor sentiments," said Karishma Phatarphekar, Partner & Practice Leader, Transfer Pricing services, Grant Thornton India LLP, a leading assurance, tax and advisory firm.
The finance minister's proposal to increase the rate of tax on payments by way of royalty and fees for technical services to non-residents from 10 per cent to 25 per cent has not gone down well with the multinationals operating in India, as they will now have to pay more tax while receiving royalties from their Indian subsidiaries.
Tax advisors said the increase in the domestic tax rate on royalties and fees for technical services was unnecessary and went beyond the rates proposed in the direct taxes code. While this will not have a significant impact on investors from most Organisation for Economic Co-operation and Development countries, where rates have already been reduced to 10 per cent, service providers from major technology and investment partners like the US and the UK will face a hit as their tax bill will go up 15 per cent from the present 10 per cent. This is primarily because the rate of tax under US and UK treaties is at 15 per cent compared to treaties like Germany which is at 10 per cent.
The domestic withholding tax rate in case of payment of royalty would have a significant impact in relation to payments made for acquisition of content, transponder hire charges, etc, especially where the tax treaty benefit is not available.
"Though the finance minister has outlined the need to provide a stable regime for foreign investors, the clarity that was sought on many aspects on the law relating to indirect transfers is missing. This would impact mergers and acquisitions, as this is a big roadblock for global restructuring involving Indian assets," said N C Hegde, partner, Deloitte Haskins & Sells.
Payment of royalty has been a bone of contention between minority shareholders and MNCs. Shares of many multinationals fell sharply after boards decided to increase royalties and technical fees from India. The independent directors of ACC and Ambuja Cements, owned by Holcim, asked both companies to reduce technical fees by half to Holcim and seek minority shareholders' consent.
Multinationals operating in India said the increased tax on royalty will be paid by the parent and not impact the local company. "The tax will be paid by Suzuki, as it has to be paid by the receiver," Maruti Chairman R C Bhargava said. Maruti is owned by Suzuki of Japan, and pays a significant amount of its net sales as royalty to Suzuki.
Though investor advocacy groups cheered the increased tax on MNC parents, they wanted more clarity on what basis those were taking money from subsidiaries. "For example, many Indian companies have developed a brand in India, for India, but it's their foreign parent charging a hefty royalty from their Indian subsidiary. The government should make it mandatory that the majority of all minority shareholders should clear the proposal to pay royalty to foreign companies," said Shriram S, founder and MD of InGovern Research Services.
GAME GETS MORE DIFFICULT
- Budget mum on transfer pricing
- Tax advisors said the increase in the tax rate on royalties and fees for technical services unnecessary and went beyond the rates proposed in the direct taxes code
- Investor advocacy groups cheer higher tax on royalty, but want clarity on why royalty payments are going up
