Published Editorial

Budget 2017 - Easing compliance for domestic companies

February 2017

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Dinesh Agarwal
Partner, EY Tax & Regulatory Services, EY India

Parikshit Datta
Partner, EY Tax & Regulatory Services, EY India

The Finance Bill has proposed to restrict the applicability of Domestic Transfer Pricing to companies having tax holidays. Originally the provisions were introduced in 2012 covering all domestic companies having aggregate domestic transaction value of INR 5 Crore or more. This had increased the burden of compliance in the hands of domestic companies. In Finance Act 2015, the threshold was increased to 20 crores but still lots of companies were required to be compliant though not negatively impacting the tax base in India.

The new proposal rightly aim to bring all those companies under the regime which can create an impact on tax base. This position is also consistent with SC ruling of CIT v. Glaxo Smitkline Asia (P) Ltd which has laid the genesis of this provisions.

Another crucial move aligning the domestic regulation with BEPS Action plan 4 is restricting the interest expenditure on AE loan to 30% of the EBITDA. The move aims at creating a balance between equity and loan funding in domestic subsidiaries. 

Another proposal is introduction of secondary adjustment under TP regulations. The concept is very familiar in developed countries. This may have far reaching impact because if any TP adjustment leads to an addition in the income of a company, then the differential income will be treated as a deemed advance and interest will be computed on the same unless corresponding cash is repatriated to India. The amendment will have additional burden on domestic companies facing TP adjustments/ litigations.