The government’s tax collections could take a Rs 10,000-crore hit this year due to the setting up of the income-tax dispute resolution panel (DRP) for settling transfer pricing disputes. Such a dispute arises when there is a disagreement between the government and the taxpayer, especially a foreign company, in determining the tax liability of its subsidiary.
The revenue department has made a transfer pricing demand of Rs 10,000 crore from 750 companies this year. However, the amount cannot be collected by the government this year because under the new rules, DRP could take up to nine months to finalise its directions after receiving objections from taxpayers on the draft assessment order of the Income Tax Department.
It could take longer if a taxpayer, not satisfied with the outcome of DRP’s process, appeals to the Income-Tax Appellate Tribunal, which functions under the law ministry. Thereafter, the assessing officer has to pass the final order following such directions within a month.
According to the earlier rules, the tax demand could have been made in the same year by an order of the assessing officer. DRP’s decision, on the other hand, is binding on the department, as it cannot appeal against the order before ITAT.
Transfer pricing demands have been significantly rising every year. The demand stood at Rs 6,000 crore in 2008-09, against Rs 3,500 crore in 2007-08. The tax demand of Rs 10,000 crore made this year is for the assessment year 2006-07.
A finance ministry official said DRP could further delay the process, as resolution of a case might take years. “Transfer pricing is a major source of revenue for developed countries. No other country in the world has a DRP-like body. They have mutual agreement procedures and advance pricing agreements,” he added.
Another ministry official confirmed it could result in a shortfall of Rs 10,000 crore in the tax collections for the year.
The government has set a total tax revenue target of Rs 6,41,079 crore for 2009-10, which is lower than previous year’s Rs 6,87,715 crore. Its indirect tax collections stand at only 46 per cent of the Budget Estimate of Rs 2,69,477 crore for 2009-10.
Finance Minister Pranab Mukherjee has expressed hope that direct tax collections would make up for the loss. However, direct tax receipts of Rs 1,83,822 crore in the first eight months of 2009-10 are only half the target of Rs 3,70,000 crore for the entire financial year.
Underreporting of the value of transactions between related companies has often led to litigation and loss of revenue to the government. Transfer pricing regime was introduced in 2001 to provide a statutory framework to check the actual income of the subsidiaries of multinational companies in India.