Food for Thought, Law Street in The Economic Times (October's column)

Have you seen the documentary Super size me? Well, all said and done, I still gorge on potato chips, especially during the tax season when I am glued to my lap top and a working day has almost 16 hours non stop. India is set to streamline food tax. A province in Canada wants to curtail obseity through higher taxes on junk food. Cultural influences pave the path for our future taxes. With globalisation, transfer pricing issues are the hottest thing in tax land. So here is the latest column dealing with food tax and transfer pricing.

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The Economic Times Online

Food and tax go together
LUBNA KABLY [ FRIDAY, OCTOBER 27, 2006]

Once upon a time, in the good old days, when I was a full time journalist with this newspaper, the page heading of the tax pages on budget day, of this newspaper was: Taxing times, relaxing times. In this peak tax season as I grapple with the new versions of software that are released almost every day to take care of some bug or another and enable e-filing for India Inc, I wonder when the relaxing times will arrive.

Till then, I and all my colleagues will continue to burn the midnight oil, well after midnight, and gorge ourselves silly on junk food. Thinking about food led me to Zenobia Aunty’s favourite subject — tax. Believe it or not, food and tax go together.

News reports state that the ministry of food processing industry is considering implementing a single rate of tax on all food items. Currently, there is a band for food products which results in tax anomalies with similar products having duty differences up to 16%. For example, biscuits, in general, attract excise duty of 8%, while coated wafer biscuits carry a duty of 16%. In another corner of the world, in British Columbia (the western province of Canada) steps are being considered to beat obesity through taxes. One of its ministers has recently remarked that the price of some junk food items will have to increase by something like 40%, if it is to have an impact on decreased usage. This tax money can then be used in positive programmes, he had added. Fortunately, this will be a collective decision and committees in any part of the world take their own time to reach a decision. Till then, my pal Megan, who hails from that part of the world, can continue to devour potato crispies.

Since we are on the subject of food, here is some more food for thought, but a more serious one. For me, it is the transfer pricing season as well. Thus, it was interesting to learn that the Canadian Revenue Agency (CRA) has recently issued a circular, clarifying the revenue authority’s position on the similarities and dissimilarities in computing a transfer price for income-tax purposes as compared with a duty value for custom purposes. This circular admits that while the underlying principles for establishing inter company selling prices are the same, it does not mean that a transfer price can be the same for both. This is something that our revenue authorities should keep in mind.

There are quite a few differences, explains the circular. For instance, the application of different methods for custom purposes and income-tax purposes would lead to different results; the custom method will arrive at a single value whereas the income-tax method may produce a range of results; bundled transactions may be acceptable for custom purposes whereas income-tax payers may be called upon to unbundle transactions and evaluate them separately. In addition, there would be timing differences and even differences in the exchange rates used for valuation. In essence, while the CRA states that the transfer pricing documentation prepared for income-tax purposes may be useful to evaluate the reasonableness of the values established for customs and vice versa, it has recognised that revenue authorities should not arrive at unreasonable conclusions by relying on one set of documents since the purpose of that set would be fundamentally different.

It is true that rationalisation is possible, but the bottom line is that the legislation, and indeed the revenue authorities, must not go overboard. In the US, an importer cannot value merchandise inconsistently for custom and income tax purposes.

In India, transfer pricing is still at a nascent stage. The income tax transfer pricing officers and the special bench valuation officers at customs would do well to understand the subtle differences in the mechanics of transfer pricing and valuation under the two sets of regulations and not blindly rely on the results of a study under a different legislation. In fact, exchange of data between the two authorities if used wisely and well, together with introduction of an advance pricing mechanism would help not only the revenue authorities but also the multinationals who transact with their group entities in India. It will mean less hassles. So come next budget, as I look towards a rationalisation in tax on food items (hopefully something that will benefit a junk food eater like me), I also look forward to rationalisation in transfer pricing and introduction of an advance pricing mechanism.

(The author is a CA. Views are personal)