Dubbing the new rules on determining the place of effective management as "detrimental" to the interest of companies, industry chamber Assocham today said the government should not rush through.
The Central Board of Direct Taxes (CBDT) last month came out with draft guidelines on determination of Place of Effective Management (PoEM) and had invited stakeholder comments on the same by January 7.
"The so-called PoEM may have the best of intention to stop tax avoidance, but its implementation can create problems which can lead to counter-criticisms of India being tax-unfriendly to global companies," Assocham Secretary General D S Rawat said in a statement.
It suggested that the government revert back to old rules which were "easy to follow with a minimum of litigation".
Under the new proposed norms, determination of PoEM will significantly increase compliance costs, both for taxpayers and the revenue department.
"PoEM should be made applicable only to blatant cases of avoidance through shell companies which are incorporated outside India but controlled and managed from India. This will help in avoiding misapplication of these provisions," Rawat said.
Assocham suggested that the ministry should clarify that there has to be a clear basis for assessment of PoEM to kick in.
"It cannot be outcome of a roving and fishing inquiry. The principle that PoEM is a deterrent measure and not a revenue raiser should always be kept in mind," it said.
Assocham also recommended that the new rules be made effective at a later stage, if at all.
The draft PoEM guidelines have suggested two-stage process for determining the place of effective management of a company with a view to assessing its tax liability.
According to the draft guidelines, the first stage would be identification of the persons who make the key management and commercial decision for the company and second, the determination of the place where these decisions are made.
The modification of the existing norms was necessitated by the fact that many companies skipped tax liability by misusing guidelines.
Under the existing norms, many companies "artificially escape" the residential status under these provisions by shifting insignificant or isolated events related to control and management outside India.
According to the draft norms, PoEM would mean a place where key management and commercial decisions necessary for the conduct of a business or an entity as a whole are made.
