Finance minister P Chidambaram said on Wednesday that the safe harbour rules recommended by the N Rangachari committee are being given final shape and will be notified soon.
These rules would prescribe what the tax department thinks are the operational profits of businesses in different sectors. Unless an MNC declares less profits from India (and therefore less tax liability), the value of their cross-border transactions will not be audited. The government is contemplating a mark-up of close to 20% for the Indian arms of multinational IT firms, many of which have earlier received tax demands based on the department's assumption that their operational profits were much more. There could be different safe harbour norms for different sectors depending on their profitability.
Chidambaram said at a conference here (marking the first anniversary of his second stint at finance ministry during the UPA regime) that the finance ministry has already addressed a number of issues where multinational businesses had grievances related to taxation.
We must address issues relating to safe harbour rules. The revenue secretary (Sumit Bose) told me this morning that safe harbour rules will be submitted to me either today or tomorrow. I had earlier set a deadline of 31 July for these rules. I have now given a grace period of six to seven days. We will have safe harbour rules by August 7, Chidambaram said.
Under the safe harbour mechanism, tax authorities accept the quoted value of transactions between local firms and their related parties abroad without any scrutiny. The move is aimed at encouraging outsourcing of IT work by multinationals to their captive units in India. The minister said that grievances concerning software technology parks and contract research and development centres have already been addressed. The proposed rules are expected to reduce disputes between multinational firms and tax officials on transfer pricing, which accounts for the chunk of disputes.
The minister said he is hopeful of meeting his revenue collection target of R10.56 lakh crore for the current fiscal. His optimism stems from the fact that when the economy grew at 5% in 2011-12, its slowest pace in a decade, revenue receipts grew at more than 16%. If the economy grows at 5.5% in the current fiscal, there is no reason for not achieving a 21% increase in revenue collection.
The minister also said he would take the proposed new Direct Taxes Code to the Cabinet soon and that amendments to an earlier version of the Bill will be moved in the monsoon session beginning August 5.