an 85% increase in the number of transfer pricing demands by the taxman in FY12—from R1,220 crore in FY06 to R24,111 crore in FY11 and to R44,532 crore in FY12—is deeply disturbing.
In the case of Nokia, apart from the transfer pricing, there are elements of the Vodafone retrospective case as well. Nokia has been issued a tax demand of R3,000 crore for not paying taxes on the software it was importing from its Finnish parent over the years. The problem here is the explanatory memorandum of the budget (page 20 for those who’re interested) itself says “Some judicial decisions have interpreted this definition in a manner which has raised doubts as to whether consideration for use of computer software is royalty or not; whether the right, property or information has to be used directly by the payer or is to be located in India or control or possession of it has to be with the payer …”
Having said this, the Budget then says it proposes to amend the income tax act to remove any scope for confusion but, and here’s the Vodafone link, “these amendments will take effect retrospectively from 1st June, 1976 and will accordingly apply in relation to the assessment year 1977-78 and subsequent assessment years.” The taxman has done well to issue clarifications, but going all the way back to 1976?
But let’s go back to the Foxconn case. If the Chinese taxman was to say Foxconn (and Foxconn would bill Apple for it) was to pay a tax on the software it got from Apple for putting into the iPhone or the iPad, this would increase the costs of manufacturing in China—the Chinese taxman probably treats the software as yet another component that is being imported and, since the final product is being re-exported, there is no tax levied on it.
In each case, whether it is Shell, Nokia or Vodafone, or the countless others, the real issue that needs to be kept in mind is the costs of this tax stridency—this is why the Parthasarathi Shome committee was against retrospective amendments; this is why, despite everything, India has kept the Mauritius route open. And let’s make no mistake, this is about the costs of doing business in India, it is not about whether it is morally okay or not to avoid paying taxes. The fact of the matter is India does not charge taxes on all things—it