The Indian Revenue has recently issued guidelines on GAAR, to be implemented only after receiving feedback from the stakeholders.The key points are:
GAAR would be invoked prospectively i.e., on income accruing or arising from April 1, 2013.
Twenty-one illustrations were provided to clarify the GAAR provisions.The important ones are discussed below:
Holding company
GAAR is not to be invoked in case of a holding company doing business in the country of incorporation with substantial commercial substance, or in other wordss, has a Board of Directors that meets in that country and carries out business with adequate manpower, capital and infrastructure of its own;
If all the rights of voting, management, right to sell, etc., are vested with the parent company, and not the intermediary holding company, GAAR provisions would trigger;
If the entire funding of intermediary company is done by parent company and it controls the said intermediary company and plays a crucial role in India investment decisions, GAAR provisions could trigger;
It also seems to suggest that for the purpose of computing the expenditure threshold test for capital gains tax exemption under India– Singapore Treaty, interest payments made to related entities outside of Singapore should be excluded. If the expenditure test is met in relation to the expenditure incurred in Singapore, then the GAAR provisions may not trigger.
Buy-back of Shares
If an Indian company has not declared dividends for long and is then executing a buy-back of shares, which is accepted only by shareholding entity in favourable tax jurisdiction and not by shareholders in other taxpaying jurisdiction, the provisions of GAAR would trigger.
Tax Incentives
GAAR would not be invoked in case of specific tax incentive being availed - for instance, setting up of SEZ unit, Backward areas, etc, where tax holiday provisions are prescribed.
Merger
Merger of a loss-making entity with profit making entities will not attract GAAR, and the setting off of losses would be governed by the existing provisions.
Outbound Investment
An Indian company making outbound investments through a holding company in tax efficient jurisdiction would not attract GAAR provisions.
Sweet deal for Private Equity funds
The Finance Minister has taken another step to please non-resident investors by reducing the capital gains tax rate applicable to a certain category of non-resident investors on transfer of unlisted shares.
Currently, long-term capital gains are taxable at 20 per cent in the case of non-resident investors (such as Private Equity, or PE, funds).
Going forward, long-term capital gains arising from transfer of unlisted securities shall be taxed at of 10 per cent. This amendment will take effect from the current financial year.
However, this move will not specifically benefit Foreign Institutional Investors, as they already enjoy a lower tax at 10 per cent. This step will give non-resident investors reason to cheer.
It will also open doors toIndian companies with surplus cash reserves to repatriate funds to its non-resident shareholders at a lower tax cost.
Delhi Tribunal lets Liaison Offices
off the tax hook
The Reserve Bank of India (RBI) permits Liaison Offices (LO) to primarily act as a representative andcommunication channel between the foreign enterprises and Indian entities.
As a Liaison Office is not permitted to carry out income generating activities, it is generally not taxable in India.
However, Revenue Authorities are questioning the activities carried out by an LO to determine whether it constitutes a Permanent Establishment of the foreign enterprise, and consequently, whether the LOs should be taxed.
In a recent ruling, the Delhi Tribunal held that in the absence of any violation noted by the RBI with regard to the activities of a LO, it does not constitute a Permanent Establishment in India, unless established otherwise by the Revenue Authority.
This ruling should give some comfort to Liaison Offices functioning in India, though it is unlikely that the Revenue Authority will continue to keep a close watch on LOs.