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Top 10 Union Budget expectations on Indian transfer pricing

Union budget - represents the transfer pricing expectations from Indian Union budget 2023
Transfer pricing expectations in Union budget 2023

Transfer pricing regulations can affect how multinational companies (MNCs) do business in several ways. Regarding the Indian way of undertaking transfer pricing, the tune changes slightly compared to the globally established principles. The law has evolved over the past 21 years. Today, enough clarity and jurisprudence are available in the public domain for the management to decide on business affairs in light of a country’s transfer pricing and tax regulations. 

In past Union Budgets, transfer pricing has always been an integral part of the Indian tax law that has seen various amendments over the years. Over the past six months, we have spoken to industry professionals about their expectations on how the transfer pricing law should develop in India to support India’s growth story. 

Here are a few transfer pricing expectations and wish-list at the brink of Union Budget 2023.

  1. Coherence in the range: Currently, Indian transfer pricing specifies a narrower range of the 35th-65th percentile. As a global practice, most advanced countries with transfer pricing law follow an interquartile range, i.e. 25th-75th percentile. Such an interquartile range helps bring consistency while undertaking global transfer pricing studies.
  2. Safe Harbour: Rationalising high safe harbour margins, including incorporating different industries in the safe harbour regime.
  3. Secondary Adjustment: An expectation around secondary adjustment was to increase the threshold from INR 1 crore to INR 5 crore.
  4. The time around APA: Currently, an advance pricing agreement (APA) takes 30-45 months to conclude. The time period might go up in the case of bilateral or multilateral APA. The industry expects the Government to deploy a firm timeline for an APA process and bring the APA timeline in line with global standards below two years i.e. 24 months.
  5. Clarity on Share issue transaction: The industry expects that the transaction on the issue of shares should be taken explicitly out of the ambit of transfer pricing; as such, an issue of shares does not give rise to any income that needs an evaluation under transfer pricing.
  6. Marking the dispute resolution panel (DRP) effective: The plan of introducing a focused DRP was revolutionary; however, on-ground implementation of the same has resulted in it being a fast-track mechanism to reach the tax tribunal. This has resulted in inefficiencies and clogging of cases before the tax tribunal. To give higher decision-making and autonomous power to the DRP and deploy neutral members on the DRP panel rather than the tax authorities themselves.
  7. Introduction of new compliance measures: Government may introduce new compliance measures such as e-filing transfer pricing documents and mandatory use of technology, including date stamps.
  8. Increased enforcement: To promote transparency and effective governance, the government may announce measures to increase enforcement of transfer pricing regulations, such as increased audits and penalties for non-compliance.
  9. The higher limit for documentation maintenance: Mirroring the thresholds in other countries, the Indian government may consider adopting a higher threshold for compulsory maintenance of transfer pricing documentation (Currently INR 1 cr). Such a limit could be pushed up to INR 5 crores. 
  10. Commitment to Pillar II outcomes: India to showcase intent to adopt outcomes of Pillar II, i.e. official minimum global taxation @15 %.
  11. Digital taxes: India will introduce a pathway for abolishing the equalisation levy within the appropriate time period as and when the Pillar I solution on digital taxes is finalised and adopted. 

    In conclusion, the Indian government has been focusing on addressing issues related to transfer pricing in recent years, including implementing stricter regulations and increasing enforcement efforts. It is likely that the budget will continue to address these issues and may include measures to improve compliance and prevent tax avoidance through transfer pricing.

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