Skip to main content

GST Valuation rules under GST could lead to transfer pricing disputes

GST Valuation rules under GST could lead to transfer pricing disputes
As companies focus on the country’s biggest indirect tax reform — Goods and Services Tax (GST) — an old ghost of transfer pricing (TP) may come to haunt them in the coming years, warn tax experts.Transfer price is basically a price charged by a subsidiary or a division of a company to another. The rules suggest that there has to be an ‘arm’s length’ while fixing this price so that it’s not too low or too high than the existing open market prices. Tax officers can question and demand tax in case they suspect that companies are escaping taxes.
Unlike the earlier tax regime, GST has something called an open market pricing for related party transactions. Many tax experts feel that currently, the valuation rules under GST and those for calculating transfer pricing are not harmonised, and this could lead to future tax demands.Due to open market pricing for the related party transactions, goods and services, whether cross border or domestic, would now be subject to specific valuation rules.
There is still some confusion around whether the determination of open market pricing will be done based on the existing TP mechanism or whether different valuation rules would be framed, say tax experts. “Open market value may be required to be determined, although the current GST rules provide that where recipient unit is eligible for full credit, the value declared in the invoice shall be deemed to be open market value. The question is how to accommodate the timebased sensitivities of the  transaction specific indirect taxes with the annualised pricing determinations of the income tax,” said Rakesh Nangia, managing partner of Nangia and Co.
Transfer pricing disputes are mainly related to the calculation of profit made by MNCs and how they have been shifted to their parent companies. Many firms have gone to court, challenging the government’s transfer pricing calculations.Experts point out that indirect taxes are more time-specific — like time of supply is crucial –– and figures in valuation as well. Direct taxes work on the principle of aggregation — mainly based on the due date of annual tax return. Tax expert point out that it is possible that the same result can be reached under both tax systems with different approaches. “But harmony is not assured,” said a tax expert. While broader principles of valuations under GST have been announced, the precise rules are yet to be decided.
In the past three years, the tax department has gone out of its way to resolve transfer pricing issues. The tax department has been signing Advance Pricing.Agreements (APA) with multinationals to avoid future transfer pricing disputes.An APA is mainly an agreement between a tax payer - mostly multinationals — and the tax authority — CBDT in India’s case — where the transfer pricing methodology is determined. The methodology to calculate taxes could then be used for an agreed period of time on the tax payer’s future international transactions.
While transfer pricing until now was only limited to multinationals, recent changes in the tax laws would mean domestic  transactions would also come under its purview.With GST framework too dishing out valuation regulations for domestic transactions between related parties, tax experts fear that transfer pricing may find its way into several domestic situations.
The Economic Times, New Delhi  ,23th October 2017

Comments

Popular posts from this blog

RBI deputy governor cautions fintech platform lenders on privacy concerns during loan recovery

  India's digital lending infrastructure has made the loan sanctioning system online. Yet, loan recovery still needs a “feet on the street” approach, Swaminathan J, deputy governor of the Reserve Bank of India, said at a media event on Tuesday, September 2, according to news agency ANI.According to the ANI report, the deputy governor flagged that fintech operators in the digital lending segment are giving out loans to customers with poor credit profiles and later using aggressive recovery tactics.“While loan sanctioning and disbursement have become increasingly digital, effective collection and recovery still require a 'feet on the street' and empathetic approach. Many fintech platforms operate on a business model that involves extending small-value loans to customers often with poor credit profiles,” Swaminathan J said.   Fintech platforms' business models The central bank deputy governor highlighted that many fintech platforms' business models involve providing sm

Credit card spending growth declines on RBI gaze, stress build-up

  Credit card spends have further slowed down to 16.6 per cent in the current financial year (FY25), following the Reserve Bank of India’s tightening of unsecured lending norms and rising delinquencies, and increased stress in the portfolio.Typically, during the festival season (September–December), credit card spends peak as several credit card-issuing banks offer discounts and cashbacks on e-commerce and other platforms. This is a reversal of trend in the past three financial years stretching to FY21 due to RBI’s restrictions.In the previous financial year (FY24), credit card spends rose by 27.8 per cent, but were low compared to FY23 which surged by 47.5 per cent. In FY22, the spending increased 54.1 per cent, according to data compiled by Macquarie Research.ICICI Bank recorded 4.4 per cent gross credit losses in its FY24 credit card portfolio as against 3.2 per cent year-on-year. SBI Cards’ credit losses in the segment stood at 7.4 per cent in FY24 and 6.2 per cent in FY23, the rep

India can't rely on wealthy to drive growth: Ex-RBI Dy Guv Viral Acharya

  India can’t rely on wealthy individuals to drive growth and expect the overall economy to improve, Viral Acharya, former deputy governor of the Reserve Bank of India (RBI) said on Monday.Acharya, who is the C V Starr Professor of Economics in the Department of Finance at New York University’s Stern School of Business (NYU-Stern), said after the Covid-19 pandemic, rural consumption and investments have weakened.We can’t be pumping our growth through the rich and expect that the economy as a whole will do better,” he said while speaking at an event organised by Elara Capital here.f there has to be a trickle-down, it should have actually happened by now,” Acharya said, adding that when the rich keep getting wealthier and wealthier, they have a savings problem.   “The bank account keeps getting bigger, hence they look for financial assets to invest in. India is closed, so our money can't go outside India that easily. So, it has to chase the limited financial assets in the country and