In a breather to foreign investors, especially those coming via Mauritius, the government on Monday deferred the controversial General Anti-Avoidance Rules (GAAR) by two years, making the norms effective from the 2016-17 assessment year. The Parthasarathi Shome committee had recommended that GAAR be pushed three years further. All other major recommendations of the panel were accepted, with some deviations.
The finance ministry said GAAR would override the double-taxation avoidance agreement if an arrangement was solely aimed at avoiding taxes but experts said those coming under Indo-Singapore tax treaty and having tax residency certificates from Mauritius would escape GAAR. It would, however, not be invoked on those investing in stock markets through participatory notes.
The GAAR decision would clear the air on taxes, helping Finance Minister P Chidambaram (likely to begin his tour to Singapore and Europe, among other places, from January 22) reassure investors on the state of the Indian economy.
| WHEN WOULD GAAR APPLY? | ||
| If investment date is… | and transaction date is… | GAAR would… |
| Before Aug 30, ’10 | Before Apr 1, ‘16 | Not apply |
| Before Aug 30, ’10 | After Apr 1, ‘16 | Not apply |
| After Aug 30, ’10 | Before Apr 1, ‘16 | Not apply |
| After Aug 30, ’10 | After Apr 1, ‘16 | Apply |
| After Apr 1, ’16 | After Apr 1, ‘16 | Apply |
The modified GAAR provisions say an arrangement the main purpose of which is to obtain tax benefit would be considered impermissible. The earlier provisions considered impermissible an arrangement “one of the main purposes” of which was tax benefit. It would apply when the tax benefit in an arrangement is more than Rs 3 crore.
| AN IMPROVED GAAR PwC’s Gautam Mehra and Anish Sanghvi explain the factors in the final set of rules that have made the difference |
| MAIN PURPOSE: GAAR would be invoked only if the main purpose of an arrangement is to obtain tax benefit |
| DEFERRAL: Gives businesses an opportunity to review their current investment and operating structures |
| GRANDFATHERING: Relief to investors who made investments using the regulations prevailing before Aug 30, ‘10 |
| GAAR-SAAR TOGETHER: Shome panel suggestion that GAAR should not be invoked where SAAR applies not followed |
| TREATY PROTECTION: GAAR not to apply on FIIs not claiming treaty protection; no clarity on applicability on entities claiming it |
Also, GAAR would not apply on non-resident foreign institutional investors and those who don’t take tax benefit under a treaty. This means investors availing of benefits under Section 90 or 90A of the I-T Act (which provides relief from double taxation under a treaty) would be covered under GAAR. But those investing in stock markets through instruments like participatory notes would be out of the ambit.
Besides a two-year postponement instead of three, the ministry deviated from the Shome panel recommendations on two other key counts. The panel headed by Shome, now an advisor to the finance minister, had suggested all investments before the commencement of GAAR be grandfathered. But the ministry has chosen the date of August 30, 2010. Second, the committee had said the approving panel’s recommendations should be binding on the tax department. But the ministry has said it should be binding on both the assessee and tax department.
Investments made before August 30, 2010 — the day the Direct Taxes Code was introduced in Parliament — will not be taxed, even if the profits are made after April 2016. GAAR will apply on an income after the assessment year beginning April 1, 2016, on investments made after August 2010.
The panel had also recommended the abolition of short-term capital gains tax, but Chidambaram did not specifically talk about it at the press conference here on Monday. Asked whether GAAR would override the tax treaty and apply on investments from Mauritius and Singapore, he said it would if an arrangement was found to be impermissible. Tax experts, however, say GAAR would not override the Mauritius treaty, going by Shome panel’s recommendations, because of the validity of tax residency certificates.
Shome panel had said where Circular 789 of 2000 with respect to Mauritius was applicable, GAAR provisions should not apply. Where GAAR and the Specific Anti-Avoidance Rules (SAAR) with Singapore are both in force, only one would apply to a given case.
“Singapore is totally out because of SAAR provisions,” said Dinesh Kanabar, Deputy CEO, KPMG.
