The cry against India's transfer pricing norms seems to be getting louder as corporates as well as foreign investors fear the return of an aggressive tax policy, which would not only hurt India's image overseas but would also prevent Indian corporates from making further investments in the country.
Already the aggression shown by Indian revenue authorities has many multinational corporations up in arms. Nokia and Shell India on Tuesday termed the charges of violating transfer pricing rules as 'absurd and unacceptable,' lamenting that finance Minister's P Chidambaram's global roadshow to woo foreign investors would prove to be futile under an unstable tax regime.
Transfer pricing is the value at which companies trade products, services or assets, including shares, between units in different countries. The I-T department has been making huge adjustments in the past few years in the accounts filed by the companies for computing taxation.
On Tuesday, Nokia India objected to officials entering its factory in Chennai, one of its biggest facilities and termed the actions of the income-tax authorities in Chennai as 'excessive, unacceptable and inconsistent with Indian standards of fair play and governance'.
Shell India too described as “absurd” the demand for $1 billion in taxes on a $160 million equity infusion done by the Anglo-Dutch oil major four years ago, saying it tantamounted to tax on FDI. The company will challenge the notice that alleged tax evasion by under-pricing share transfer between member firm.
“It is effectively a tax on FDI,” she said. “We do need the right signal that India is going to be a stable fiscal, legal, tax regime. We are not going to have surprises along the way," said Yasmine Hilton, the India Head of Royal Dutch Shell
Income tax department has charged Shell India of under-pricing a share transfer within the group by Rs 15,220 crore, and consequently evading taxes. The order relates to the issue of 8.7 crore shares by Shell India to an overseas company Shell Gas BV in March 2009. The shares were issued at Rs 10 a share, which the income-tax authorities contest and peg higher at Rs 183 a share instead.
The IT lens, however, doesn't stop here. A report in the Business Standard today points out that Indian companies that have made acquisitions abroad by setting up a a special purpose vehicle may soon attract a tax too as the taxman wants corporate guarantees, or even interest-free loans given by corporates to their subsidiaries abroad to attract tax.
"Tax authorities argue, as two independent parties in similar circumstances would have charged fees as compensation for the financial facility provided by one party to the other, tax should be levied on the fees," the report said.
The move will not only make mergers and acquisitions more expensive, but is sure to anger the top deck of India Inc as leading companies like Tata Motors, Tata Steel, Jindal Steel and Power, Hindalco etc have made acquisitions through similar structures.
Last week several corporates received letters for paying lower service tax and excise duty. Japan Airlines, handset maker Nokia, Country Inn and Simplex Infrastructure are some of the companies that received harsh letters from the indirect tax authorities, while telecom companies such as Airtel, Uninor and Indus Tower will have to face a special audit to figure out actual tax payments.
The government has budgeted to collect over Rs 5.05 lakh crore in the current fiscal from indirect taxes that comprise of excise, Customs and service tax, and Rs 5.70 lakh crore from direct taxes. Under pressure from the government to meet these collection targets, tax officials are going after foreign companies.
But as Sudhir Kapadia, national tax leader, Ernst & Young rightly told the Economic Times, "There is an urgent need to retract these unfounded and ill-advised moves by the revenue department, else this will balloon into yet another never-ending tax controversy, nullifying the recent positive steps taken by the government to improve the overall investment climate in India."
The fact that taxation has upset India Inc became evident when drugmaker Cipla's former MD Yusuf Hamied recently said that businessmen are now willing to say goodbye to India and move abroad due to the business-unfriendly environment in India.
"The tax policies and lack of basic infrastructure are huge problems in India. Because of lack of prudent tax and stable policies, all big Indian companies are going abroad. The time has now come for us to say goodbye to India," he had said in an interview with the Economic Times.
And this view is widely shared in corporate corridors due to the disconnect between the finance ministry's promise of a non-adversarial tax regime and the execution and implementation by India's bureaucracy.
It seems India is at the brink of losing its competitive edge as an investment destination due to a lack of credibility. Without clarity and a stable, uniform tax regime India will not be able to woo any investor, be it domestic or global.