Nasscom - Deloitte Report on Indian Safe Harbour regime: Strengthening India’s position as the strategic hub of innovation and value creation | nasscom | The Official Community of Indian IT Industry

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Nasscom - Deloitte Report on Indian Safe Harbour regime: Strengthening India’s position as the strategic hub of innovation and value creation

Tejasvi

@tejasvi

October 1, 2024

Public Policy

247

Over the past several years, India has scaled up as a hub for innovation and Research and Development (R&D). With the services sector rapidly evolving and driving the country to the forefront of tech-driven innovation, Global Capability Centres (GCCs) have emerged as key nodes for transformation, innovation and new technologies, helping organisations be agile in a highly dynamic global business environment.

India is home to more than 1700 multinational GCCs, employing over 1.9 million people, across various verticals such as automotive, aerospace and defence, manufacturing and medical devices, specialising in Information Technology (IT), Business Process Management (BPM) and Engineering Research and Design (ER&D) services.

The GCCs, being related parties to their global entities, are governed by Indian and international transfer pricing regulations for arriving at the profit margins on which taxes are applicable. The design of the transfer pricing mechanism and its implementation can significantly impact the investment decisions of a multinational enterprise in relation to its GCCs strategy across various jurisdictions.

Achieving transfer pricing parity with some of the margin optimised countries and fostering an environment conducive to the creation of significant knowledge-based employment in the export of services can significantly strengthen India’s position as an attractive and competitive choice for GCCs, specifically ER&D GCCs. Safe Harbour rules enable pre-set rates of profit margins to be to be “accepted” by the revenue authorities. Designed well, these can enable ease of doing business and highlight India as a tax competitive jurisdiction from a transfer pricing perspective.

In this regard, we have submitted a report on the Safe Harbour Rules and suggested specific recommendations, as outlined below:

A. Abolish or significantly increase the eligibility threshold: The safe harbour regime should be made available for all related party entities. Given the competitive nature of industry, rate of profit margins are not observed to be usually higher merely because a company is bigger in terms of annual revenues. Therefore, abolish or significantly increase the eligibility threshold for SHR in line with the above discussions;

B. Reduce the Safe Harbour margins and do away with the distinction between IT & ER&D and ITeS & KPO in software development and KPO, as these definitions have outlived their utility, and such distinctions are not adopted or able to be followed by companies in practice. Accordingly, reduce the categories of services to account for blended/integrated service offerings and collapse them under the following two service categories in line with the data provided above and the business realities:

ITeS and KPO – 12%;
IT services including contract R&D – 14%

C. Remove the condition of insignificant risks for entities to be eligible for availing the SHR: Considering the business realities of GCCs operating in India, the requirement of entities with insignificant risks for the purpose of availing the SHR should be done away with. This is on account of the reasons mentioned above that the comparable companies selected are the ones with significant risk and also that the GCCs in India over the period have moved up the value chain and perform key functions, thereby bearing limited risk; and

D. Extend Safe Harbour facilities to companies that are already currently undergoing a TP audit or facing TP adjustment: This should be done by allowing the SHR rates to be substituted in lieu of the proposed adjustment at the option of the taxpayer. This would circumvent the long-winded litigation process and yield net positive revenue and a taxpayer-friendly outcome.

The detailed report is attached. Please write to tejasvi@nasscom.in in case you have any questions.

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Tejasvi