India put in place the regime of advance pricing agreements (APAs) — which allows setting the prices of cross-border transactions (transfer pricing) in advance — in 2012 and it has since been touted as a runaway success. But an acute staff crunch with the tax department is threatening to spoil the party.
While as many as 220 APAs, including 20 bilateral pacts, between the tax departments have been signed so far, over 500 applications are remaining unresolved as there is not enough personnel to evaluate them.
“We are concerned about the paucity of manpower and have communicated the same to the board (CBDT). But it is not easy to get the right personnel for a very niche field,” a senior tax department official said, on condition of anonymity. Currently, the international taxation division of the income tax department, which handles APAs, consists of 15-20 officials, spread across various centres, while the workload demands staff strength many multiples of this.
Although the average time taken for concluding an APA is much shorter in India (2.5-3 years compared with 3.5 years in the US), the staff crunch has taken a toll on the efficiency of the APA framework. “In the US, the APA cell is manned by over 500 professionals,” the official added.
The speed of concluding APAs in India appears to be creditable, considering that China has finalised just 113 APAs in the ten years between 2005 and 2014.
“Its likely that more middle-sized firms would seek APAs going forward compared with the current trend where mostly large firms opt for these agreements,” Partho Dasgupta, partner at BDO India, said.
Dasgupta added: “With the framing of rules for country-by-country reporting and maintenance of master file, smaller firms will also look at APAs favourably, thus potentially increasing the department’s task manifold.”
The APA mechanism has helped allay the fear that India’s tax authorities are aggressive in seeking in transfer pricing adjustments. TP adjustments sought by the department had grown exponentially — from Rs 1,220 crore in 2005-06 to over Rs 70,000 crore in 2012-13 — but has since fallen. TP adjustments are demanded by the tax department when it suspects income suppression by multinational companies in cross-border related-party deals. In late 2015, the TP rules were relaxed, as per which if the price audited falls between 35th and 65th percentile of a data set, it would be considered as arm’s length price and and no TP adjustments would be demanded.
In fact, the CBDT tried to correct the paucity of staff by creating two new posts of APA commissioners in Mumbai and Bengaluru in FY17. At the end of FY17, over 640 application were being processed. A year later, the department continues to deal with 500 pending applications, which is far from ideal.
The issue of lack of trained staff was acknowledged by CBDT chairman Sushil Chandra. “An important challenge facing the programme is the availability of trained manpower to handle the complex nature of the work. Another challenge is how to expand and strengthen the program by providing human and physical resources,” Chandra said in a report released in April last year.
Kunj Vaidya, leader, transfer pricing, PwC, said, “We (India) have concluded close to 90 APAs in each of the last two years, which indicates we are doing fairly well. The pending applications can be resolved quickly if officials are not transferred frequently as is the norm in other government departments.”