Transfer Pricing Rules and Challenges Under GST

As per the tax experts review on GST implementation, the old-issue of transfer pricing can tremble the system in coming future. Goods and services tax (GST) is rolled out with an aim to “one nation, one tax” and it is the biggest indirect tax reform in the country since ever.

What is Transfer Price?

A transfer price is meant for the price which is used in a transaction between the divisions or the subsidiaries of the multi-entity firm. The rules mentioned for transfer price suggest that the gap between the transfer pricing is of arm’s length so it can maintain the price ratio between the high and the low market prices. The transfer price (TP) should not vary more from the open market price because it can create a loss for one of the entities and affects the performance.

Open Market Price Under GST Regime

The tax officers have rights to ask if they doubt the companies for avoiding taxes. In GST regime, the similar party transaction has an open market pricing which is better than the previous tax system where there was no such kind of facilities was available. The experts explain that the valuation rules in the new indirect tax system are not in accordance with the calculation of transfer pricing, which can create the tax demands in coming time.

Because of the new rules for an open market price under GST for related party transaction, it becomes mandatory to apply specific valuation rules on the cross-border or domestic goods and services.

Read Also: Free Supply of Goods Under GST: Rules and Provisions

The Confusion In Determining Open Market Price

Tax experts say, As the new valuation rules are not clear to the businesses, there is confusion about the implementation of valuation rules on open market pricing. The main question is that the calculation of open market pricing will be either based on earlier transfer pricing rules or some different rules have been approached.

Rakesh Nangia, Managing Director at Nangia & Co. said, “an Open market value may be required to be determined, although the current GST rules provide that where recipient unit is eligible for a full credit, the value declared in the invoice shall be deemed to be open market value. The question is how to accommodate the time-based sensitivities of the transaction specific indirect taxes with the annualised pricing determinations of the income tax.”

Disputes On Transfer Pricing

The main confusion between the MNCs and parent companies is that how they divide and calculate the profit made by subsidiaries. So many conflicts have occurred so far which lead to court cases in challenging government about the valuation rules for calculating transfer pricing.

To Resolve Transfer Price Issue

The experts suggest that indirect tax system is time-bound as a time of supply and calculation of prices undervaluation rules play an important role. Apart from this, the direct tax system concentrates on the last date of filing a tax return on annual basis. An expert says, It is also possible to reach the same target by applying different ways under both the indirect and direct tax systems but harmony can vary in this practice. Although the valuation rules have been declared by the GST Council, the precise rules are not decided by the Council yet.

The tax department has been trying its hard to resolve the issues under transfer pricing since last three years and signed Advance Pricing Agreements (APA) with multinationals to solve out the issues.

Advance Pricing Agreements (APA)

In respect to India, APA is an agreement, signed by a taxpayer (multinationals) and tax authority of India (CBDT), to evaluate the transfer pricing methodology. This procedure to calculate the taxes can be utilised for a stipulated period of time which is agreed by both for taxpayer’s international transactions in coming time.

Previously, transfer pricing was only related to the multinational, but GST implementation has made the domestic transactions also under the ambit of transfer pricing rules. As GST system is varying the valuation rules for a domestic transaction made between two related parties, the tax experts are feeling uneasy as transfer pricing can probably separate out the way while putting in domestic situations.