The business landscape is evolving at an unprecedented scale due to the advent of new technology and processes. Today, the world is more connected than ever, thanks to the internet. The contemporary hyper-globalisation has helped businesses flourish beyond domestic boundaries. As a result, export and imports have grown significantly over the past two decades. New laws must be brought in place to keep a check on the ever-evolving business world. Transfer pricing is one such example. Read on to learn more about transfer pricing in India.
Understanding transfer pricing in India
The Transfer Pricing Law was introduced in India through Section(s) 92 A-F and relevant rules 10A-E of the Indian Income Tax Act, 1962. It sheds light on cross-border transactions between ‘related parties’ should occur. The term related party is also comprehensively defined under this law to avoid confusion. The law ensures that any transaction incurred between ‘related parties’ should be at a price that would be comparable if it was between unrelated parties. The idea is to stop companies from exploiting tax loopholes in foreign nations.
For example, suppose A is a company in the US and B is its subsidiary in India. In that case, the transactions between A and B should be at a price that is equivalent and comparable to the same transactions occurring between unrelated companies in the market. The various section of the transfer pricing law describes different elements of the law comprehensively. These elements include arm’s length price, associated enterprises, international transactions, documentation, etc.
Myths and facts related to transfer pricing in India
Now that we have a fair understanding of what transfer pricing entails let’s quickly dive into the popular myths and facts related to transfer pricing in India.
- Prices cannot be compared for unique goods and services
Many businesses believe that their goods and services are so unique that prices cannot be compared. Therefore, they feel that the transfer pricing law does not applyto their offerings. However, it is essential to note that the tax authorities have an extensive record of prices for various goods and services. Therefore, uniqueness will not stop them from applying the transfer pricing law.
- Custom authorities keep an eye on prices for compliance with market rates
It is important to note that both customs and tax authorities have contradictory interests that might be opposing. Tax authorities find low prices acceptable as it leads to lower deductions from profits and allows for a higher tax expense. On the other hand, customs authorities prefer a higher price for goods and services as it will enable them to levy hefty custom duties. Price approval from customs authorities doesn’t safeguard companies from tax authorities regarding transfer pricing.
- Small companies are not onthe radar
Another popular myth about transfer pricing is authorities do not check small companies. It’s not true at all. Although small companies are not subject to frequent scrutinise, they are not spared from the tax authorities at any cost. Small companies with a fair turnover are on the radar of tax authorities as they don’t have the means to fight against a transfer pricing case. Therefore, it is essential to follow all norms related to transfer pricing regardless of the company’s size.
- No need to prepare anything until asked
Most companies feel there is no need to prepare anything until asked by authorities. However, this is not the case. The transfer pricing documentation must be submitted within 30 days of the request from tax authorities. This is a little time when you see what all needs to be prepared. Therefore, companies must take a proactive approach toward transfer pricing documentation. A lot of things need to be prepared, including info about the taxpayer, related party and the transaction, justification for the chosen transfer pricing approach, and computation of the market price ranges.
- Fines are small
Another popular myth among companies is that the fine for not adhering to the transfer pricing norms is minimal. However, contrary to this popular opinion, not abiding by the transfer pricing laws can incur heavy penalties. Penalties can be as high as 50% of the tax payable amount in case of under-reported income.
Transfer pricing law has brought a revolutionary change in the global business world. It has curbed illegal and unethical business practices to ensure a level playing field for all businesses.