| Safe harbour fails to drawfirms |
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New Delhi, 25 December After receiving a lukewarm response to safe harbour rules, aimed at providing certainty on taxation of transactions abroad between related parties and reduce transfer pricing litigation, the finance ministry is considering reducing the profit margins as industry found the markups too high. The deadline for providing details of international transactions under which a safe harbour had been opted was December 5 but the Central Board of Direct Taxes ( CBDT) has not found many takers for the rules, announced in September, after getting feedback from industry. A safe harbour is defined by the Indian Income- tax law as circumstances in which the tax authority shall accept the transfer price declared by the taxpayer. "We are compiling the data from various field formations and may review the mark- ups if the response is bad across the sectors," said a finance ministry official, who did not wish to be identified. Under the rules, CBDT had prescribed profit margins between 20 and 25 per cent for various sectors. In other words, in a cross- border transaction with an associated company, the department would not question the income of the Indian unit if the operating profit margin declared was 20- 25 per cent, depending on the sector. The grouse of the industry is that very few companies would be making these kinds of margins in today's market and hence, the mark- ups have been lower. A transfer pricing expert with a multinational consultancy said only a handful of his clients have opted for safe harbour as they thought it would be better to contest the income tax department's claims in court rather than declaring higher margins than they actually made and pay higher tax. He said the margins proposed by authorities under Advance Pricing Agreements ( APAs), which are pacts between the taxpayer and the tax department, were much lower than safe harbour. For instance, for software development services, the safe harbour is 20 per cent but in some APAs, a margin of 14 per cent was proposed by the APA authority. The CBDT, however, has not yet accepted it. "Safe harbour rules were announced to give an opportunity to taxpayers who did not want to fight it out in court. The margins were kept deliberately high as we were giving them certainty. On the other hand, APAs involve a lot of fact finding and that's why margins are lower," justified another official. The official said the markups were in line with recommendations of the Rangachary committee and derived after looking at recent cases where taxpayers had agreed to margins of 15 to 17 per cent. Other concerns of the industry are that safe harbour rules continue to impose the burden of maintaining transfer pricing documentation on taxpayers opting for it. Also the rules exclude taxpayers transacting with low tax or no tax countries. Sometimes, companies suppress profits arising out of transactions with their foreign subsidiaries to reduce tax liability in India. Safe harbour rules were announced as a result of increased transfer pricing disputes between the tax department and these companies. Last year, notices were sent to Shell, Vodafone, Essar, Bharti Airtel, Microsoft, and IBM, among others. Of about 3,200 cases taken up for transfer pricing auditing in 2012- 13, an adjustment of ₹ 70,000 crore was made in 1,600 cases. In 2011- 12, an adjustment of ₹ 44,531 crore was made in 1,343 cases. This represented an increase of 57 per cent. The CBDT has not found many takers for the rules announced in September after getting feedback from industry |
| A stronger backbone for regulators Mr. S.L.Rao |
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The Telecom Regulatory Authority of India was created in 1997. The Central Electricity Regulatory Commission came in 1998, and other state electricity regulatory commissions followed. In more recent years, the Petroleum and Natural Gas Regulatory Board ( PNGRB), the Information Commission at the Centre and states to implement the Right to Information Act, the Airport Economic Regulator and Competition Commission of India were created. Others in the offing are statutory regulators for coal, roads and real estate. Their decisions are subject to appeal to appellate tribunals headed by retired judges. The functions, appointment, composition, terms of service and reporting relationships of the various statutory regulators have varied with the willingness of the ministry concerned to hand over its authority to an independent regulator. In the case of infrastructure ( telecom and electricity), the intention was to encourage private investment ( domestic and foreign) in capital- intensive projects, stimulate competition and safeguard the consumer interest. External pressure was exerted by the World Bank that felt private investment required decisions with major financial impact be taken independently, transparently and in consultation. The need for this was greater in India, where most infrastructure was dominated by governmentowned enterprises. Given the multiplicity of ministries and the intense battle to protect turfs, each ministry created its own statutory regulators. There was no coordination between them as there was none between the ministries. The powers of each infrastructure regulator ranged from decision- making on licensing entrants, determining tariffs, approving capital expenditures, settling consumer grievances, safety issues, encouraging competition at all levels ( investment, tariffs, consumer choice) to stimulating investment. Government departments that had to notify the rules that activated the regulatory authority under the relevant Act did so partially and/ or after long periods of time. Some regulators could not exercise full authority for a long time. Many state governments instructed their enterprises not to implement the regulator's order. Penalties for noncompliance ranged from a pittance to substantial ones. The selection of regulators was by government functionaries. Tenures were sometimes very short, since the retirement age was 65. The secretary of the ministry was permitted to become a regulator. Selections were almost always confined to central service officers of government, and sometimes other services and government- controlled enterprises. Government servants were paid the approved salary after deducting their pension from earlier service, thus, demonstrating that their work as regulators was a continuation of their past government service. There is no provision for their oversight except by courts on appeal against their orders, and for an annual report tabled with the legislature. Since 2011, the Planning Commission has been unsuccessfully trying to put together a common framework for infrastructure regulation. The draft Bill deals with some infirmities of the past, but leaves untouched the major faults. It gives tariff- setting powers to all regulatory bodies. Governments have to explain to their legislature if they use their powers to overrule a regulatory commission's orders. Government servants appointed to regulatory positions will retain their full pensions. No one from the ministry concerned will be appointed to its regulatory commission for some time after he has left the ministry. There are lacunae that must be addressed. " Offices of profit" are forbidden to members. This is too vague and ignores newspaper columns, writers, adjunct professors, membership of boards of companies in quite unrelated areas. The draft Bill also does not provide overriding any conflicting provisions in existing legislation regarding any infrastructure regulatory body. It still does not seek to rationalise the proliferation of regulators, with every ministry creating one or more independent regulatory commissions. "Regulatory diarrhoea" is not sought to be controlled. As an example, all energy issues are not under one regulator (power, oil and natural gas, coal, atomic energy, renewable energy). The case with transport — roads, inland waterways and railways — is the same. The accountability of regulators continues to be restricted to the annual reports they must submit to the legislatures, though they are never discussed in those forums. There is no mechanism to discipline them and their members. We should introduce the American system of independent regulatory bodies appearing regularly before a committee of the legislature to answer its questions. The regulatory commissions must not have to explain the rationale for their orders to the legislature committee. The fiction of "regulatory assets" introduced by some state electricity regulatory commissions, whereby legitimate expenses are kept aside and not given in tariffs, should have been specifically forbidden. All approved expenditures given in tariff submissions must be allowed in tariffs. Regulatory commissions must either allow or disallow expenses of the regulated entities in determining their tariffs. The draft must put a limit on cross- subsidies and its reduction each year. Penal powers for regulatory commissions to be imposed on the office- bearers and functionaries of a utility for noncompliance of orders must be laid down. PNGRB and the Tamil Nadu Electricity Regulatory Commission were non- functioning for some time because the administration did not notify their powers. This should have been forbidden. Such a provision exists in the Right to Information Act. The selection committees for regulators must make a provision for non- bureaucrats from academia, chambers of commerce, the media, and so on. The Bill must provide a penalty on officials who delay completing the selection process in the stipulated time. There must be a numerical limit on present and former government servants appointed to any independent regulatory commission. An upper age limit for candidates above which they cannot be considered must be kept at 62 years, so that the appointee can serve a full term of four years. The provision for termination of a regulator must include provision for an investigating and penalising agency, perhaps the tribunal or high court. Grounds for investigation must include allegations of corruption or conflict of interest. Consumer associations must be funded to appear knowledgeably before the regulatory commission. The minutes of meetings of the national and state advisory committees must be published and publicised. Provision for all appointees submitting an asset list at the outset and thereafter every year includes spouse and children. So what happens when the child is estranged or living abroad? Regulatory commissions must be required to ask utilities to submit a timebound plan for implementing their orders — for example reducing transmission and distribution losses. This will enable mid- course correction of tariffs or other matters, if the implementation is unsatisfactory. The commissions must have a regular monitoring over the year. Some directions of appellate tribunals should find place in the draft. This could be about not allowing " regulatory assets", or not filing tariff requirements in time or at all. The author is Distinguished Fellow Emeritus, Teri, and former director general of the National Council for Applied Economic Research ( NCAER) The Planning Commission's draft of a framework for infrastructure regulation deals with past infirmities but leaves major faults untouched The draft Bill gives tariff- setting powers to all regulatory bodies. Governments have to explain to their legislature if they use their powers to overrule a regulatory commission's orders BINAY SINHA |
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