The General Anti Avoidance Rules (GAAR) emerged for the first time in the draft DTC in 2009 and thereafter in a modified form in DTC Bill, 2010. GAAR was introduced by Finance Act 2012, effective from April 1, 2013.

It received a poor response from the investors and taxpayers and therefore, an Expert Committee led by Parthasarathi Shome was constituted by the Prime Minister to finalise the guidelines on GAAR.

The committee had given its final report on September 30, 2012. In a statement by the Finance Minister on January 14, 2013, the Government substantially accepted the said report. On certain recommendations, it has accepted the report partially.

CLEAR POSITION

The main recommendations of the report that have been accepted by the Government are:

The Finance Act , 2012 provides that the transaction/ arrangement will be impermissible where the main purpose or one of the main purposes is to obtain tax benefit.

The Government has accepted the Committee’s recommendation of GAAR being invoked only if the main purpose of the arrangement is to obtain tax benefit.

Where only a part of the arrangement is impermissible, the tax consequences of an ‘impermissible avoidance arrangement’ will be limited to that portion of the arrangement and not to the whole arrangement.

As a welcome relief for FIIs, GAAR will not apply to FIIs who do not seek protection under any tax treaty. GAAR will also not apply to non-resident investors in the FIIs.

A monetary threshold of Rs 3 crore tax benefit to a taxpayer in a year has been accepted for applicability of GAAR provisions. However, the statement is silent as to whether the tax benefit would comprise of only tax or include interest also.

Requiring the tax auditor to report on any tax avoidance scheme which may be held as impressible has been accepted, but it is unclear whether the tax auditor would be required to report all tax avoidance arrangements without any monetary limit. This requirement is indeed very onerous for the auditors.

Ensuring that same income would not be taxed twice in the hands of the same tax payer in the same year or in different assessment years. The acceptance of these major recommendations by the Government is a welcome step and it will regain the faith of investors/stakeholders in the government’s policies and tax laws.

AREAS OF DOUBT

However, there are some recommendations which have either been accepted (with modifications) or the statement of the Finance Minister is silent about them, like-

The Committee had recommended deferral of GAAR by three years so as to equip the tax administration with required skills and train the department by setting up appropriate procedures and related processes.

The Government has accepted the proposal of deferment, however, it has deferred it only for two years. Now the GAAR would be made applicable from AY 2016-17, i.e., for financial year 2015-16.

The Committee recommended that where SAAR is applicable to a particular element, then GAAR would not be applicable.

The Finance Minister has stated that where GAAR and SAAR are both in force, only one of them will apply to a given case and guidelines will be made regarding the applicability of one or the other. Therefore, it leaves an element of ambiguity on certainty of applicable provisions.

In the existing provisions of the Income-tax, there was no provision on ‘grandfathering’ of investments.

The Committee had recommended that investments made by resident/ non-resident and existing as on the date of commencement of the GAAR provisions should be grandfathered so that on exit (sale of such investments) on or after that date, GAAR provisions are not to be applied to such transactions. The Government while accepting the concept of grandfathering has kept the cutoff date as August 30, 2010, the date of introduction of the Direct Taxes Code, Bill 2010.

The rationale of linking the grandfathering date with the introduction of Direct Taxes Code, Bill 2010 is not clear.

It should be either from April 1, 2012 when the statutory provisions for GAAR in the Act came into force or from the date of implementation of GAAR provisions.

Another unexpected change is that the directions of the approving panel shall be binding on assessee also. Therefore, in case the Panel’s decision is not acceptable to the assessee, the only recourse available to it would be to file appropriate writs before High Court.

There are certain areas which are still open and it is not clear whether the recommendations made in this regard by the committee have been accepted by the Government, for instance, non- applicability of GAAR to examine genuineness of residency of Mauritius entities (till circular 789 is abolished); exempting tax on short-term gains arising from transfer of securities which are subject to securities transaction tax both in the hands of residents as well as non-residents etc.

More clarity is needed on these significant aspects. With the acceptance of major recommendations in substance, the Government has taken a major step in boosting investor confidence and trying to bring more certainty on tax matters. Accordingly, GAAR ought to apply only in cases of abusive, contrived and artificial arrangements; however, one would need to wait for the form in which amendments are made in the Budget 2013 to see that both in letter and spirit these have been carried out.

Then, it will be the task of the tax administration and the Panel to implement these in an effective manner.

(The author is Executive Director — Direct Tax and Regulatory Services, PwC India. Inputs from Anju Dodeja, Manager, PwC India.)

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