Safe Harbour Rules 2017 – Indian Government walking the talk!

June 12,2017
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Bhavik Timbadia (Partner, BMR & Associates LLP)

Ankit Goel (Director, BMR & Associates LLP)

Background

It was back in 2013, when the Ministry of Finance (“MoF”) had issued Notification dated 18 September 2013 and inserted “Safe Harbour Rules” (“SHR 2013”) by way of Rules 10TA to Rule 10TG in the Income-tax Rules, 1962. Though notification of SHR 2013 was a welcome step and provided much needed certainty to multi-national corporations (“MNCs”) in respect of the eligible transactions, there were only a handful takers for the SHR 2013 primarily due to high proposed safe harbour margins.

There was a lot of expectation from the government to come out with revised Safe Harbour guidance so that the rules can serve the intended purpose of simplicity and reduction in litigation. It is in this light and basis several recommendations, MoF issued notification no. 46/2017 dated 7 June 2017 thereby amending the safe harbor rules (“SHR 2017”) for existing set of eligible transactions and also specified new category of safe harbor for low value adding IGS (“LVIGS”). Keeping its word on non-adversarial tax regime the government has reduced erstwhile Safe Harbour rates for small taxpayers, broadened the horizon of eligible transactions and dealt with some issues prone to litigation.

A brief snapshot of the eligible transactions, circumstances for application of SHR 2017, threshold, and the safe harbor margins is provided below:

S.No

Eligible International transaction

SHR 2013

SHR 2017

Threshold

Safe Harbour Margin

Threshold

Safe Harbour Margin

1

Software development services

Upto INR 500 crore

>= 20% on operating costs (“OC”)

Upto INR 100 crore

>= 17% on OC

Above INR 500 crore

>= 22% on OC

Above INR 100 crore & upto 200 crore

>= 18% on OC

2

IT enabled services

Upto INR 500 crore

>= 20% on OC

Upto INR 100 crore

>= 17% on OC

Above INR 500 crore

>= 22% on OC

Above INR 100 crore & upto 200 crore

>= 18% on OC

3

Knowledge process outsourcing (“KPO”)

None

>= 25% on OC

Upto INR 200 crore

Employee cost to OC

Margin

<40%

18%

>=40% & <60%

21%

>60%

24%

4

Advancing of intra-group loans to wholly owned subsidiary (“WOS”)

Upto INR 50 crore

>= SBI rate (30 June) + 150 basis pts

Refer point 5 & 6

Above INR 50 crore

>= SBI rate (30 June) + 300 basis pts

5

Advancing of intra-group loans to WOS & loan is in INR

Not applicable

Credit rating

Interest rate of one year marginal cost of funding rate of SBI plus

AAA to A

SBI rate + 175 basis pts

BBB-, BBB, BBB+

SBI rate + 325 basis pts

BB to B

SBI rate + 475 basis pts

C to D

SBI rate + 625 basis pts

NA & Total loan to all AEs <= 100 crore

SBI rate + 425 basis pts

6

Advancing of intra-group loans to WOS & loan is in foreign currency

Not applicable

Credit rating

Interest rate of six month LIBOR of relevant foreign currency (as on 30 September) plus

AAA to A

LIBOR + 150 basis pts

BBB-, BBB, BBB+

LIBOR + 300 basis pts

BB to B

LIBOR + 450 basis pts

C to D

LIBOR + 600 basis pts

NA & Total loan to all AEs <= 100 crore

LIBOR + 400 basis pts

7

Corporate guarantee to WOS

Upto INR 100 crore

>= 2% on amount guaranteed

Upto INR 100 crore

>= 1% on amount guaranteed

Above INR 100 Crore + WOS has been rated at adequate to highest safety by SEBI registered rating agency

>= 1.75%

...


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