There may be major changes in the norms for international taxation if the concept paper on simplified income tax is anything to go by.

According to sources close to development, the paper proposes four new concepts for making the taxation of foreign companies in India and foreign transaction of Indian companies, especially overseas mergers and acquisitions, more transparent.

These include the concept of General Anti Avoidance Rule, Controlled Foreign Corporation, Thin Capitalisation Rule and Advance Price Mechanism.

Besides, the Central Board of Direct Taxes has suggested streamlining the withholding tax applicable for the domestic entities and the rates prevalent in various double taxation avoidance treaties.

Sources said usually the rates applicable for the domestic entities should be either higher or the same compared to the rates applicable for the treaties since they are based on bilateral ties with respective government.

However, in India's case, the prevalent withholding tax paid on various payments made to overseas entities like royalty, technical fees or interest paid on external commercial borrowings is usually 10 per cent.

On the other hand, the withholding tax prevalent in various treaties range between 15-20 per cent of the accrual.

Income tax consultants explained that an advance pricing arrangement refers to transfer pricing methodology. An agreement is made between the taxpayer and the competent taxation authorities that a future transaction will be conducted at the agreed-upon price, which is recognised as the arm's length price for the period designated.

Arm's length price is the basis for taxation for the dealings between the Indian entities and their overseas entities or vice-versa.

The arm's length price specifies that pricing of the transactions between the two related entities have been done on the basis of market prices and not above or below it. Right now, the Indian income tax stipulates arm's length prices for various transactions.

Thin capitalisation norms seems to limit the amount of debt used to fund the foreign operations of Indian companies.

This policy is adopted for discouraging excessive use of debt for foreign acquisitions, which leads to tax evasions, explained a consultant . This is because the debt is then used as a deduction from the assessable income. Under the thin capitalisation norms, such debt deductions are disallowed.

Similarly, a controlled foreign corporation is a legal entity that exists in one jurisdiction but is owned or controlled primarily by tax payers of different jurisdiction. CFC laws are enacted to stop tax evasion through the use of offshore companies in low-tax or no-tax jurisdictions.

General Anti Avoidance rule is for reducing tax avoidance and aims to stop many of the complex avoidance schemes worked out by individuals and corporate sector.

Cap on trade margins

The domestic drug industry and trade representatives have agreed to the plans of the chemicals and fertilisers ministry to fix a cap on trade margins for branded generic medicines.

Branded generic medicines constitute over 15 per cent of the domestic drug market, and are promoted through the trade network and not through doctor's prescriptions.

In an interaction with ministry officials here today, representatives from the Indian Drug Manufacturers Association, Confederation of Indian Pharmaceutical Industries, SME Pharma Industries Confederation (SPIC) and All India Organisation of Chemists and Druggists indicated their willingness to cut trade margins of these medicines that enjoy a market of Rs 3,000 crore (Rs 30 billion). 

However, the associations failed to give a unified view on how to operationalise this suggestion.

According to industry representatives, there was near consensus on the suggestion to link the maximum allowed retail price of a branded generic to the price of the top selling brand in that category.

"The industry has suggested that the prices of such medicines can be 30 to 50 per cent less than the price of the market leader. It is for the ministry to finalise this view," said Jagdeep Singh, president, SPIC.

NV Mohan, president, AIOCD, said that the trade was willing to settle for 35 per cent and 15 per cent margins for wholesale and retail trade, respectively, of branded generics.

The issue of trade margins has been engaging the attention of the government and the industry ever since the government noticed that generic drugs (unbranded as well as branded generics) have unrestricted trade margins which is at times more than 1,000 per cent.

The ministry move comes after the group of ministers looking into the draft pharma policy decided to finalise its views on the policy in its next meeting. Trade margin of drugs is an important issue being considered by the GoM.

The government had also proposed a voluntary cap on drug trade margins in November 2006. However, its move was put on the backburner after the draft pharma policy, which promises a cap on drug trade margin, was forwarded to the GoM headed by Agriculture Minister Sharad Pawar.

The trade margins for all medicines, which come under direct price control, have been fixed at 8 per cent for wholesale and 16 per cent for retail trade. The ministry move is to have some control over the trade margins of medicines that come outside the direct price control.