The Union Budget should increase eligibility thresholds under safe harbor provisions from current levels of up to Rs 200 crore in international transactions to Rs 2,000 at least, according to the National Association of Software and Service Companies (Nasscom), which represents India’s $200 billion technology industry. Safe harbor rules or conditions relieve taxpayers from obligations typically imposed under the Transfer Pricing Regulations introduced in 2001.

"A firm can currently only apply for a safe harbor margin if its overseas transactions total up to Rs 200 crore per year, which excludes many entities. Not only do Global Capability Centers (GCCs) exist, but even in the traditional IT/BPM field, corporations with ownership in subsidiaries can easily exceed the Rs 200 crore limit through transactions between the offshore center, which could be a company abroad. This means that almost none of our industry, which includes information technology and business process management, would be able to take use of the safe harbor," said Ashish Agarwal, vice-president and head of public policy at Nasscom.

Nasscom, which also represents startups, proposed that Indian-origin foreign-incorporated enterprises be allowed to list directly in India. An expert committee of the market regulator Sebi has suggested that equity shares of companies incorporated outside India be permitted to be listed on Indian stock exchanges. Its recommendations have yet to be implemented.

“No other country's transfer pricing legislation provides safe harbor margins, especially for IT-ITeS. Countries classify software development/ITeS as 'routine services,' with a lower mark-up (often around 5%). Even for R&D services, a maximum margin of 10-12% is used. We investigated the United States, United Kingdom, China, Poland, the Philippines, Malaysia, and Israel, among other countries. We need to streamline the margin rate categories in India and deliver margins that are comparable to international ones,” said Agarwal. The applicable safe harbor margins in India are 17-18% for IT-enabled services, 18-24% for KPO, and 24% for contract R&D.

According to Agarwal, the IT industry's top priority for the Budget are transfer pricing issues, particularly advanced pricing agreements (APAs). "We're attempting to stimulate more investment in the IT sector. We are looking into steps that could help the industry with exports, given that overall growth is decreasing. So, as we look ahead to the next few years, I feel it is vital that our taxes remain competitive globally. One of the most crucial parts of that scenario is transfer pricing," he said.  India should pursue an advanced pricing timeframe similar to China's, which is now around six months.

"This requires work from different perspectives. One alternative is to boost staffing. Furthermore, new applications for advanced pricing agreements may be renewals of existing advanced pricing agreements with little modification and similar circumstances. So, you might create a fast track for renewal," added Agarwal. Nasscom, which also represents startups, recommended allowing Indian-origin foreign-incorporated companies to list directly in India. An expert group of the market regulator Sebi has proposed allowing equity shares of companies formed outside India to be listed on Indian stock exchanges. Its recommendations have not yet been adopted.