Sunday, February 10, 2013

There is no denying that the Indian Government is in a fiscal mess. Hence it wants to leave no stone unturned in its efforts to garner as much revenue as it can. What's helping the Government in this endeavour in a big way is a wing of the IT department, the Directorate of Transfer Pricing. Last year, it managed to rake in a cool Rs 660 bn and there's the target of collecting an additional Rs 440 bn this fiscal.

There is nothing wrong in the concept of transfer pricing we believe. After all, what is earned in India should certainly be subject to Indian taxes. Our worry though is the danger of this concept being taken too far.

Recently, there was a case where the transfer pricing authorities forced the Indian subsidiary of an MNC to pay taxes on its advertising and marketing spends. The transfer pricing department was of the view that beyond a certain amount, the advertising expenditure in fact ended up promoting the MNC brand. Thus, taxes need to be paid on this extra expenditure. Now, this is akin to entering a grey territory we believe. As it cannot be convincingly established what expense is towards enhancing local sales and which one's towards promoting the MNC brand? Thus, things like this should better be left alone. Otherwise they could end up hurting the investment climate in the country.