India: “Faceless” audits and future rules expected for transfer pricing audits

India recently overhauled its audit system. There are factors that taxpayers operating in India need to consider.

This report outlines India’s recently overhauled audit system and highlights factors

Over the past several years, the Indian government has taken concrete measures to change its image from an aggressive tax jurisdiction to a taxpayer- and investor-friendly regime. Continuing that effort, the Indian tax authority has taken a giant leap forward with the introduction of the “Faceless Assessment Scheme.”

Intended to make the entire tax system seamless, painless, and faceless, the “Transparent Taxation – Honoring the Honest” platform was launched in August 2020—a major reform that includes the Faceless Assessment Scheme. The tax authority carried out a small Faceless Assessment Scheme pilot program in 2015 and expanded the program in 2019. Because of the success of the pilot program and the challenges created by the coronavirus (COVID-19) pandemic, the tax authority decided to proceed with a full-fledged implementation of the new program and reallocated approximately 68% of its personnel to the program.

The new program is a complete overhaul of the way audits are conducted in India. True to its name, the Faceless Assessment Scheme eliminates human interaction between taxpayers and the tax authority by conducting the audit entirely through digital communication; taxpayers do not even know the names of the tax agents conducting the audit. Although there are obvious advantages, including increased efficiency, the Faceless Assessment Scheme also has many potential drawbacks, including the inability to speak directly with the agent conducting the examination, which could increase the burden on taxpayers subject to examination.

Taxpayers operating in India that are not prepared for an audit under the Faceless Assessment Scheme could find themselves challenging adjustments not based on the relevant facts or law and could even be subject to penalties if they do not respond to the tax authority in the required time frame.

The Faceless Assessment Scheme covers all resident taxpayers and tax issues except for cases involving search and investigation matters. Thus, an Indian incorporated entity, including a subsidiary of a multinational enterprise, is subject to the new program. Nonresident taxpayers and cases involving search and investigation matters will continue to be audited in the traditional manner.

Transfer pricing audits are not covered. However, enabling provisions have been introduced in regulations to apply the Faceless Assessment Scheme to transfer pricing audits. The tax authority is expected to release separate guidelines for faceless transfer pricing audits that would be effective no later than 31 March 2022.
 

Read a May 2021 report* [PDF 264 KB] prepared by KPMG tax professionals

*Reprinted with permission of the publisher

 

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