The Centre is not only eyeing a fair share of taxes on international transactions undertaken between related parties of a multinational network with presence in India, but even untaxed profits stashed overseas.
Through fresh measures — popularly called secondary adjustment provisions under transfer pricing — the government has made sure that profits parked abroad via such transactions come back to India within a specified time limit.
Under this move, the excess money (primary adjustment over ₹1 crore) that is available with the foreign associated enterprise, if not repatriated to India within the prescribed time, will be “deemed” as an “advance” and interest on such advance (loan) will be levied till the money comes back to India. This interest income will also be taxed in the hands of the Indian affiliate entity.
The Central Board of Direct Taxes (CBDT) has come out with the rules to operationalise the secondary adjustment provisions of transfer pricing introduced in this year’s Budget. It has specified a 90-day time period and also prescribed the manner in which interest computation would be done.
India is not the only country to have introduced secondary adjustments in its transfer pricing provisions. There are several countries, including the US, Japan and Australia, that have already done this. The UK has come up with draft proposals on this front.
For instance, if an Indian affiliate of a MNC transfers good to its foreign entity at, say, ₹90 when the arm’s length price is, say, ₹100, then the Income Tax Department can, as a primary transfer pricing adjustment, bring the difference of ₹10 to tax in India. Now, the tax department also wants to ensure that the entire ₹10 (gain made abroad) comes back to India so that the country can utilise the full economic benefit of that transaction. This will also remove the imbalance between actual profit and cash account of the assessee.
The fact that no time period has been prescribed by the latest CBDT rules for levy of interest and could extend in perpetuity has come as huge dampener
While India may want to protect its cash flow and foreign capital in a manner that is aligned with other countries also, ideal would have been to plug the dividend distribution side of it. This CBDT move would bring significant hardship on companies and lot more clarifications are required on the way the latest rules are drafted