Understanding Transfer Pricing in India and its Tax Implications (Part 2)

Transfer Pricing in India: Concepts, Compliance, and Taxation

Tax Implications, Compliance, and Recent Reforms

India’s transfer pricing rules influence a company’s tax bill by stopping income shifting and tax base erosion. When prices don’t match market levels, the tax office adjusts profits—raising tax owed and, often, penalties. With growing scrutiny, transfer pricing compliance is no longer a box-ticking task.

Recent updates focus on improving efficiency, transparency, and dispute prevention, particularly in the wake of increased digital and intangible transactions.

 Penalties and Risks for Non-Compliance

Mistakes or gaps in transfer pricing put businesses in the scope for steep penalties. The penalties are:

·        Failure to maintain documentation: Up to 2% of the value of international transactions may be fined.

·        Failure to file Form 3CEB: Flat ?100,000 penalty.

·        Misreporting or concealment: Penalties can range from 50% to 200% of the tax underreported. If the tax office views it as willful concealment, penalties jump to as much as 300%.

 Latest Developments

From 2025, Indian tax law strengthens in response to changing global business:

·        Block Transfer Pricing Audits: Instead of auditing one year at a time, authorities can review a block of years together, streamlining findings.

·        Expanded Safe Harbour Provisions: More industries and types of transactions now qualify, making compliance easier for more taxpayers.

·        Digital Transactions and BEPS: Authorities are watching cross-border e- commerce and intangibles closely. Significant Economic Presence (SEP) rules now capture digital firms earning from Indian customers, even without a physical base in India.

·        Filtered adoption of OECD standards: India updates its regime to align with the BEPS (Base Erosion and Profit Shifting) initiative, but keeps special rules to protect its tax base.

 

India is now more connected to global standards, but with local twists to defend its revenue.

 Conclusion

Transfer pricing in India has become a major focus for tax authorities, moving far beyond routine compliance. With increasing scrutiny—especially around digital transactions and evolving safe harbour rules—businesses must prioritize accurate documentation and a solid understanding of the rules. Seeking expert advice early and staying updated with the latest changes can significantly reduce the risk of audits and long legal battles. In today’s fast-changing tax landscape, being proactive and well-prepared isn’t just helpful—it’s essential for protecting your business.

 

-Team ELPL