The new rules are based on the recommendations made by a committee headed by former Central Board of Direct Taxes (CBDT) chairman N Rangachary.
Transfer pricing refers to the price at which divisions of a company transact with each other. Safe-harbour principles are international disclosure practices to check litigations in transfer pricing — an accounting mechanism undertaken by multi-national corporations (MNCs) to reduce tax liabilities.
Differing tax rates in different tax jurisdictions can create perverse incentives for corporations to shift income among countries to evade taxes. Applicable to six sectors including IT and ITeS, auto ancillary and pharma, companies can take refuge under the norms for five years to avoid getting into long tax disputes.
The ministry has relaxed various provisions to ensure more companies come under the purview of safe-harbour norms and the transaction threshold has been raised from `100 crore to `500 crore for IT and ITeS sectors. Transaction up to Rs. 500 crore would have a safe-harbour margin of 20% and those above `500 crore would have margin of 22%.
Definition of KPO has also been rationalised to provide reasonable distinction from regular business process outsourcing activity. The safe-harbour operating margin for this has been reduced to 25% from 30%, as per the recommendation of the Rangachary committee.
“The notification ...is indeed a very positive and significant step by the government in creating a positive tax environment,” said Dinesh Kanabar, deputy CEO, KPMG in India.