New Delhi, Sept. 1: The Parthasharthi Shome panel today recommended delaying the implementation of the GAAR by three years.
The General Anti-Avoidance Regulations (GAAR) were introduced in this year’s budget (finance bill) but then deferred by a year after stock markets tanked on fears of FIIs being taxed for their investments here.
Industry chambers also voiced their concern against the rules that allowed tax authorities to declare any business deal an “impermissible avoidance arrangement” if the deal was seen as crafted to dodge taxes.
Justifying the delay, the expert committee on GAAR, said it would not lead to much of a tax loss and would give India time to train its taxmen “in the finer aspects of international taxation”.
The “investment climate in the country has suffered (a) serious setback and investor confidence has been hit mainly because of the concerns over the impact of retrospective tax laws and the GAAR,” said the panel.
“The committee has recognised that the Indian economy has not yet reached the level of sophistication of developed countries which have implemented the GAAR,” said Neeru Ahuja, partner, Deloitte Haskins & Sells.
The Shome panel also recommended that capital gains tax on transfer of securities should be scrapped. The suggestion may, however, not be accepted as securities were brought under the ambit of taxation when P. Chidambaram was finance minister during the UPA-I government.
As a step towards reassuring global investors, the panel said the GAAR should not be invoked to examine the genuineness of the residency of entities in Mauritius.
This implies that all FIIs who claim they function out of the tax free island of Mauritius with which India has a double taxation avoidance treaty, can continue to buy and sell shares in Indian stock markets without paying taxes. Some 51 per cent of foreign investments into Indian stock markets are routed through either Mauritius or Singapore.
The 108-page report will now be circulated by the finance ministry to stakeholders for comments before the government takes a final call on the recommendations.
The panel further said, “Tax reduction through legal means is increasingly considered a matter of right of taxpayers... Tax reduction through unethical means should not be allowed, particularly when effective rates of tax are unduly reduced.”
It also said the GAAR should not be invoked in intra-group transactions which may result in tax benefits to one person (or enterprise) but overall tax revenue is not effected. It also made it clear that only cases where the tax involved was more than Rs 3 crore should be taken up under these rules.
However, the GAAR would be applied in cases where the business deal has been struck to abuse tax laws or where they are artificial arrangements meant to defraud the exchequer.
According to the panel, the GAAR should apply “only in cases of abusive, contrived and artificial arrangements.”
Besides, it said, the administration of the Authority for Advance Ruling (AAR) be strengthened so that rulings could be obtained by corporate houses within a time frame of six months.
It said the income tax act may be amended to provide that only arrangements which have the main purpose (and not one of the main purposes) of obtaining tax benefit should be covered under the GAAR.
The committee said where the treaty itself has anti-avoidance provisions, such provisions should not be substituted by the GAAR.
“The committee recommends that where the SAAR (Specific Anti-Avoidance Rules) is applicable to a particular aspect, then the GAAR shall not be invoked to look into that aspect,” it said.