Union Budget 2016 – Key Transfer Pricing proposals

The Hon'ble Finance Minister of India presented the third Budget of the Modi Government on 29 February 2016. In the backdrop of significant global slowdown and a need to jumpstart the economy, the Finance Minister's job was to strike an intricate balance between growth, fiscal consolidation and the promise to provide ease of business coupled with a non-adversarial tax regime.

In the recent past, transfer pricing has been a much debated topic in corporate board rooms as well as Government ministries worldwide. The OECDalongwith the G20 and certain other countries have issued the Base Erosion and Profit Shifting (BEPS) Guideline in October 2015 emphasizing on the need to focus on conduct and substance rather than contract and legal form in tax determination. Pricing of intra-group transactions is also a potential trigger for BEPS and expectedly found a crucial place in the OECD BEPS Guidelines.

Clarity on taxation of non-resident ~ few steps to overarching theme of ease of doing business in India

The issue of applicability of certain tax provisions to non-resident has always been a matter of debate and led to controversy in Indian tax administration. Bringing clarity in taxes, reducing litigation is one of the prime objective of the present Government. To achieve the said objective, the Government has taken few steps in the proposed Budget 2016, and has provided clarity on some of the issues faced by the non-resident.

Exemption from requirement of furnishing Permanent Account Number [PAN]

In order to ensure that more people come under the tax net, the Finance (No. 2) Act, 2009 had introduced section 206AA under the Income-taxAct. This section provided for higher withholding tax rate of 20%, if the payee does not provide the PAN, with an exception for non-resident in respect of payment of interest on long-term bonds as referred to in section 194LC. In order to reduce compliance burden for non-resident, it is now proposed that with effect from 1 June 2016, in addition to interest on long-term bonds, the provisions of section 206AA shall not apply to a non-resident in respect of any other payments subject to such conditions as may be prescribed.

This is a welcome relaxation as most of then on-resident tax payers having one time transactions may not have PAN.

Deemed conclusion under section 78a - Welcome provision

The budget, 2016-17 has fulfilled the wishes of the assessees to a great extent and one of the provision that is being welcomed by the assessees is the deemed conclusion of proceedings under section 78A of the Finance Act. This article is an attempt to discuss the amendment made in section 78A of the Finance Act. This section pertains to penalty on any director, manager, secretary or officer who is engaged in the day to day operations and conduct of business and was knowingly party to the contravention made by the organisation. The penalty provisions contained in the section 78A are produced for the sake of convenient reference as follows:-

SECTION 78A. Where a company has committed any of the following contraventions, namely:—

(a) evasion of service tax; or

(b) issuance of invoice, bill or, as the case may be, a challan without provision of taxable service in violation of the rules made under the provisions of this Chapter; or

(c) availment and utilisation of credit of taxes or duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the rules made under the provisions of this Chapter; or

Controversy regarding Rate of Service Tax – Whether as per Section 67A or as per Point of Taxation Rules? Union Budget 2016 provides the key.

History of Section 67A:

Section 67A of the Finance Act, 1994 was introduced by The Finance Act, 2012 with effect from 28-05-2012 which is reproduced below:

"67A. The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

Explanation.—For the purposes of this section, "rate of exchange" means the rate of exchange determined in accordance with such rules as may be prescribed".

Plain reading of the above provision suggest that the rate of service tax prevailing on the date of provision of service shall be relevant for the purposes of determination of service tax liability. However, such an interpretation would make the Point of Taxation Rules, 2011 redundant for the purposes of determining service tax liability which was the main objective of framing such rules.