Modi’s Goal of Tax-Friendly India Hits a Manpower Hurdle

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Narendra Modi
India's Prime Minister Narendra Modi. Photographer: Kuni Takahashi/Bloomberg

India’s goal of a friendlier tax regime for global companies to help power China-beating economic growth is hitting a manpower hurdle.

Fewer than 20 officials face the complex task of working with hundreds of multinationals on pacts to avert tax rows, people familiar with the matter said, asking not to be identified as the staffing data aren’t public. Just 11 such advance pricing agreements have been struck out of about 580 applications since the program began in 2012, they said.

The pacts clarify the levies allowed when a foreign company transacts with its Indian unit, deals that in the past sparked court cases involving Vodafone Group Plc and Royal Dutch Shell Plc over the tax due. Japan’s Mitsui & Co. has an agreement in place and another with Mitsubishi Corp. is in the works, but the backlog is substantial, the people said.

“We don’t think the progress is very slow,” said Akhilesh Ranjan, the competent authority on international taxation for the Indian government in New Delhi. “But if we have more resources we could try to make it faster.”

Prime Minister Narendra Modi’s government has pledged stable and competitive tax rules to woo investment as part of a broader agenda for faster economic expansion to curb poverty.

His cabinet in January said it won’t appeal a Bombay High Court ruling that sided with Vodafone’s local unit in a case involving the issuance of shares to its U.K. parent.

Income Adjustments

That may also help Shell, which got a favorable ruling from the same court on a similar matter. Officials had sought income adjustments of about $2.7 billion in the two cases, Bloomberg BNA reported.

International transactions involving overseas companies and their Indian units spark transfer pricing questions about how to value the deals for tax purposes.

More than half of Indian tax litigation stems from transfer pricing, Bloomberg BNA reported. The pending advance pricing agreements aim to prevent such problems.

Finance Ministry spokesman D.S. Malik declined to comment on how many applications remain to be processed.

The mechanism “stalled” after a good start, said Gautam Doshi, a tax expert in Mumbai at the Reliance Group, which is owned by billionaire Anil Ambani. A “hawkish” tax regime, sluggish bureaucracy and a lack of manpower may be among the issues, he said.

U.S. Experience

In the U.S., more than four times as many officials were working on advance pricing agreements as of December last year, according to a government analysis. Some 108 applications were filed and 101 executed in 2014. The U.S. has put in place 1,401 pacts since 1991, with 336 applications pending.

India’s tax department was scrutinizing 470 billion rupees ($7.3 billion) of multinational companies’ income in the year ending March 2011 for transfer-pricing violations, people familiar with the matter said in February. Officers have been told to avoid unnecessary litigation, they said.

Even so, the risk of tax disputes continues to loom in India, where there’s also pressure to boost one of the lowest collection rates as a proportion of the economy in the world.

Nokia Oyj, Vodafone, Cairn India Ltd. and Cadbury chocolate maker Mondelez International Inc. are among those embroiled in a range of spats for claims of about $10 billion.

A row flared in April over demands on foreign funds for $95 million on past capital gains. That dispute has weighed on the S&P BSE Sensex index, which is down 3.6 percent this year. The benchmark fell 0.9 percent in Mumbai on Monday.

Modi’s government has blamed decisions taken before it took power in May last year for some of the tussles.

It’s vowed to refrain from fresh retrospective claims under laws passed in 2012 and deferred anti-avoidance rules. Modi plans to cut the corporate tax rate to 25 percent from 30 percent and set up a goods and services levy to ease commerce.

While that’s welcome, processing is discouragingly slow for those in the queue for advance pricing agreements, according to Vijay Iyer, a tax specialist at Ernst & Young in New Delhi.

“The government needs to set a deadline for moving the files,” he said.

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