Defer GAAR by 3 yrs, says Shome panel

Calls for Mauritius, Singapore to be kept out of purview, suggests abolition of tax on gains from transfer of listed securities

Allaying investors’ fears over the General Anti Avoidance Rules (GAAR), an expert panel on Saturday recommended that the rules be deferred by three years. It also called for treaty nations such as Mauritius and Singapore to be kept out of GAAR’s purview. In a major positive for the markets and investors, it also suggested the abolition of tax on gains from transfer of listed securities.

The draft recommendations by the Parthasarathi Shome committee, which was set up by Prime Minister Manmohan Singh in July to soothe wary investors, significantly differs from the draft guidelines issued by a finance ministry committee in June.

 

“It would be perspicacious for the government to postpone the implementation of GAAR for three years with an immediate pre-announcement of the date to remove uncertainty from the minds of stakeholders,” the panel said in its draft report, adding the deferment would give more time to taxpayers as well as the tax administration to plan a change in the anti-avoidance regime.
 

SHOME PANEL DRAFT REPORT: KEY RECOMMENDATIONS

• Amend the Income Tax Act, GAAR guidelines; issue clarifications through circular 
• Defer GAAR by three years on administrative grounds 
• GAAR should not apply to investments from Mauritius if tax residency certificate is provided 
• GAAR should not apply if there is limitation of benefit in a treaty, such as with Singapore 
• Only arrangements with the main purpose of obtaining tax benefit be covered under GAAR 
• Approving panel should have five members, with a retired high court judge as chairman 
• Give an illustrative list of tax mitigation or a negative list for the purposes of invoking GAAR 
• GAAR should not be invoked in transactions between associated persons or enterprises 
• Rs 3-cr tax benefit in a year threshold should be used for applicability of GAAR 
• All investments before introduction of GAAR (not arrangements) should be grandfathered 
• Abolish tax on capital gains as well as business income from transfer of listed securities 
• Govt may consider increasing Securities Transaction Tax rate to offset revenue loss

The Union Budget had proposed to introduce GAAR from this year itself, but it was subsequently deferred to April 1, 2013, following adverse reactions to the proposed new regime. The committee wants it deferred until 2016-17 financial year, that is, 2017-18 assessment year.

The Shome panel also recommended the abolition of tax on gains from transfer of listed securities — as capital gains or business income — on residents as well as non-residents. At present, there is no long-term capital gains tax, but short-term tax at the rate of 15 per cent is levied on gains from trading in listed securities.

To make the proposal tax neutral, the panel suggested that the government might

consider increasing the rate of Securities Transaction Tax (STT) appropriately.

The committee’s suggestions would need amendments to the Income Tax Act as well as GAAR guidelines. It has recommended that GAAR provisions should be applied when the tax benefit accruing to a person is more than Rs 3 crore in a year. The Central Board of Direct Taxes (CBDT) committee had preferred the figure to be in lakhs.

While CBDT had said GAAR would be invoked if “one of the main purposes” was to obtain tax benefit, the Shome panel said only arrangements with the main purpose of obtaining tax benefit should be covered. It did not agree with suggestions from some sections of industry that the existing arrangements should be kept out of the GAAR purview, but all investments made before the introduction of GAAR should be spared.

“The panel has recognised the Indian economy has not yet reached the level of sophistication of developed countries that have implemented GAAR,” said Neeru Ahuja, partner, Deloitte.

The panel wants that GAAR should not be invoked in intra-group transactions (transactions between associated persons or enterprises), which may result in tax benefit to one person but overall tax revenue is not affected either by actual loss of revenue or deferral of revenue.

The committee has also said the panel authorised to give approval for invoking GAAR should consist of five members, with a retired judge of a high court as its chairman and two members from outside the government. CBDT had proposed three members — two chief commissioners and one joint secretary from the law ministry.

The committee has recommended refraining from treaty override where the treaty itself addresses the issue of tax avoidance. It has said, where Circular 789 of 2000 with respect to Mauritius is applicable, GAAR provisions should not apply to examine the genuineness of the residency of an entity set up in Mauritius.

It has also suggested that the administration of the Authority for Advance Ruling should be strengthened so that a ruling may be obtained within the timeframe of six months.

The panel, which also comprised former Irda member, N Rangachary, NIPFP Member Ajay Shah, and Revenue Department Joint Secretary Sunil Gupta, has invited comments from stakeholders and the general public on its recommendations by September 15. It will submit final recommendations by September 30.