Indian tax authorities have signed 88 Advanced Pricing Agreements (APA) in the financial year 2016-17, "probably the highest by any jurisdiction in the world”, said an annual report published by the Central Board of Direct Taxes (CBDT), the apex policy-making body of the Income Tax Department.
An APA is a mechanism wherein the tax authorities and the company involved come to an agreement on the value of a cross-border transaction and the quantum of taxation in order to avoid potentially expensive and long drawn out litigation .
So far, 152 agreements have been signed under India's APA program which became fully functional and operational on August 30 2012. Of these, 141 were unilateral and 11 bilateral. One of the reasons for the gap is that the United States did not admit applications for bilateral APAs until as recently as February 2016, the CBDT report said. That a lot of American subsidiaries operated out of India was also a contributing factor, it added.
These 152 APAs were signed over a span of four years as compared to 113 signed by China over a 10-year period. India takes 29 months, on an average, to process an application as opposed to 34 months for unilateral and 51 months for bilateral APAs in the U.S., the report highlighted.
Satya Poddar, partner - tax and regulatory services at EY, said that the numbers were encouraging and that even advanced nations were unable to match them. The success of India's APA program was one of the main reasons why America has returned to the negotiating table to discuss a Mutual Agreement Programme (MAP), he added.
If there is one good news story for Indian tax administration in the recent past it has been the APA program . The government has been proactive and accommodating.Satya Poddar, Partner - Tax And Regulatory Services, EY
The number of agreements concluded each year has also been rising sharply since the inception of the programme. While only 9 unilateral agreements were concluded in the first two years, more than 130 have been concluded since 2015. The number of bilateral agreements concluded rose from two in 2015-16 to eight in 2016-17 .
However more needs to be done to clear the more than 700 applications that are still pending. Ketan Dalal managing partner at Katalyst Advisors LLP said the ghost of India's litigation record was leading to an unusually large number of APAs being filed leading to a huge backlog. The government needs to build investor confidence by ensuring that issues that would have earlier been litigated by the tax department will reduce substantially so that APA inflows come down, he added.
In order to clear the backlog the government could perhaps do two things; bunch cases, with a broader mindset and of course increase the senior level manpower so that calls can be taken faster.Ketan Dalal, Managing Partner, Katalyst Advisors
With America opening up their bilateral program last year India-U. S bilateral applications have topped the charts at 42, followed by the U.K. and Japan at 39 and 17, respectively.
The services sector which is the largest contributor to India's GDP is responsible for 72 percent of the unilateral APA applications filed. While 292 transactions have been covered by 141 unilateral agreements across 20 industries ranging from banking to forestry and chemicals, a majority of the transactions were in the software development and information-enabled services space.
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