The government introduced new tax rules on Wednesday aimed at reducing litigation with multinational firms over cross-border transactions the government considers tax avoidance schemes.
The new "safe harbour" rules aim to clarify transfer pricing, over which disputes have surged under a government drive for revenue to narrow a yawning fiscal deficit and stave off a threatened ratings downgrade. Revenue secretary Sumit Bose said the new rules would clarify the tax liability of companies.
"It will be applicable for five years beginning assessment year 2013/14," Bose said.
The government later issued a statement laying out the new rules.
Multinational firms have drawn increased scrutiny by governments around the world over transfer pricing, particularly following revelations that coffee chain Starbucks Corp used the practice to avoid paying taxes in Britain.
Transfer pricing, or the value at which companies trade products, services, shares or assets between units across borders, is a regular part of doing business for a multinational. Experts say transfer prices are also a way for a company to minimize its tax bill.
In April, India said 27 companies, including the local units of HSBC, Standard Chartered and Vodafone, underpaid taxes in the last fiscal year after they sold shares to their overseas arms too cheaply.
India has targeted several multinational companies for tax audits on transfer pricing in recent years, but has widened the scope of its investigations since last year, tax officials have said.