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The Finance Ministry on Wednesday ruled out introduction of Advance Pricing Agreement (APA) programme for deciding tax liability of the companies in advance in the near future, saying that in the absence of an institutional mechanism such system would not be effective.
"This is an issue on which we had sought information from Nasscom and other bodies. One can take a view only after understanding the institutional mechanism that can be put in place," a senior Finance Ministry official said at a meeting of American Chamber of Commerce (AMCHAM) on Wednesday.
An Advance Pricing Agreement is a binding contract between a taxpayer and the tax authority under which the two parties agree on the transfer pricing policy for specified transactions of the taxpayer over a given period of time. APAs may be unilateral -- involving the tax authority of one country -- or bilateral and multilateral involving tax authorities of two or more countries.
He said the APA programme could not be implemented in the absence of an institutional mechanism that could ensure that such agreements are not questioned in the court of law or by the authorities like Comptroller and Auditor General of India (CAG) and the Central Vigilance Commission.
The ministry is still awaiting the feedback from industry bodies. The official said that in countries like the US and Japan, where the programme is in operation, it usually takes up to three years for signing the agreement once the application for APA is filed.
"The Indian situation is different as we are a democracy and there are political changes every five years. So what will be the institutional mechanism that is available to protect such agreements," he said, adding that no official would 'risk' his career by signing an agreement with companies on tax liability that could be questioned later.