Since liberalisation of the Indian economy in 1991, the government has all along laid a red carpet to lure foreign investors. However, for the last 4-5 years, policies of the government have been somewhat discouraging towards foreign investments. In this context, introduction of General Anti Avoidance Rules (GAAR) needs a special mention. The Direct Tax Code Bill, which was introduced in the Parliament included General Anti Avoidance Rules (GAAR). While the DTC Bill is yet to be passed, in a hurry to introduce GAAR, Finance Bill, 2012, introduced GAAR provisions, which were scheduled to take effect from 1 April, 2013.
The Corporate world in India did not accept the version of GAAR as introduced by Finance Bill, 2012 and the stock market reacted very sharply. It was felt that GAAR will give unbridled powers to authorities, which can be misused particularly because the line of distinction between tax saving and tax evasion is very thin. It was therefore, apprehended that Revenue may interpret GAAR according to its own whims and fancies.
A large number of representations were sent to the Finance Ministry to relax the rigour of GAAR. Since taking a quick decision on this issue was difficult, GAAR was postponed by one year and deferred to 1 April 2014. Meanwhile, an Expert Committee (EC) on GAAR, under the chairmanship of Dr. Parthasarathi Shome was constituted by the Prime Minister to vet and rework on GAAR, based on comments received from various stakeholders and the general public. The EC has submitted its final report on 1 October 2012. Recently, a press release dated 14.01.2013 contains a statement from Finance Minister that the government has accepted major recommendations of the EC with some modifications.
The provisions of GAAR will now come into force with effect from April 1, 2016 as against the current provision of April 1, 2014. As per the press release, the following important amendments are being made in GAAR-
- The assessing officer will be required to issue a show cause notice, containing reasons, to the assessee before invoking the GAAR provisions.
- The assessee shall have an opportunity to prove that the arrangement is not an impermissible tax avoidance arrangement.
- The Assessing Officer has to make reference to CIT for invoking GAAR. The CIT, in turn, after affording opportunity to taxpayer, shall decide as to whether the arrangement is impermissible avoidance agreement, or not. If CIT is not satisfied with the reply of the taxpayer, he shall refer the matter to the Approving Panel.
- The Approving Panel shall consist of a Chairperson, who is, or has been a Judge of a High Court; one Member of the Indian Revenue Service not below the rank of Chief Commissioner of Income-tax; and one Member who shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices. The current provision that the Approving Panel shall consist of not less than three members being Income-tax authorities or officers of the Indian Legal Service will be substituted.
- The directions issued by the Approving Panel shall be binding on the assessee as well as the income-tax authorities. The current provision that it shall be binding only on the Income-tax authorities will be modified accordingly.
- While determining whether an arrangement is an impermissible avoidance arrangement, it will be ensured that the same income is not taxed twice in the hands of the same taxpayer in the same year or in different assessment years. This situation may arise under the current provisions of GAAR.
- Investments made before August 30, 2010, the date of introduction of the Direct Taxes Code Bill, 2010, will be ‘grandfathered’. It implies that GAAR provisions would not be invoked at the time of exit of investments which were made before August 30, 2010.
- GAAR will not apply to such FIIs that choose not to take any benefit under tax treaties. GAAR will also not apply to non-resident investors in FIIs. Therefore, if an FII opts for provisions of the I.T.Act (instead of tax treaty), GAAR would not be applicable.
- A monetary threshold of Rs 3 crore of tax benefit in the arrangement will be provided, in order to attract the provisions of GAAR.
The modified provisions of GAAR are certainly welcome. However, a lot still remains to be done. For example, authority of Approving Panel that its directions shall be binding on the assessee also needs to be reconsidered.
The Finance Minister has himself said that ‘There is universal acknowledgement that we have handled the GAAR situation fairly effectively and buried the ghost that GAAR will be some kind of a monster.’
Email: hp.agrawal@sskmin.com a.gupta@sskmin.com
