GAAR: Constitution of an Expert Committee

General Anti-avoidance Rule (GAAR) is a concept which generally empowers the Revenue Authorities in a country to deny the tax
benefits of transactions or arrangements which do not have any commercial substance or consideration other than achieving the tax
benefit.

In India, there are specific anti-avoidance provisions in the domestic tax laws as well as ‘limitation of benefits’ clauses in some tax
treaties. Additionally, the Government proposes to introduce GAAR provisions through the Direct Taxes Code. The proposed GAAR
provisions would override the provisions of the tax treaties signed by India. The Direct Taxes Code Bill, 2010 (the Code), after its
introduction in Parliament, was referred to a Standing Committee of Parliament. The Standing Committee has obtained the views
and recommendations of various stakeholders. Currently the Standing Committee is examining the Bill. The Code, which was
planned to be effective from 1 April, 2012 is expected to be delayed. However, given the importance of the GAAR provisions from the
Government’s perspective and the developments by way of the judicial outcomes of some important matters over some time, one
would not be surprised if GAAR provisions are introduced in the current laws. (Source: Removing the fences:Looking through GAAR: PWC)

Highlights

• The General Anti Avoidance Rule, or GAAR, was proposed in mid-March as part of the budget for fiscal 2013.
• GAAR aims to target tax evaders, partly by stopping Indian companies and investors from routing investments through Mauritius or other tax havens for the sole purpose of avoiding taxes.
• However, the ambiguous language, the lack of details, and the sudden onset of the provisions have been among the factors that have upset foreign investors.
• Finance Minister Pranab Mukherjee on Monday proposed to defer the rollout of GAAR by a year to the financial year that begins in April 2013 to “provide more time” to both taxpayers and the tax office “to address all related issues”.
• The finance minister proposed to remove the onus of proof entirely from the taxpayer and shift it to the revenue departments.
• A local or foreign taxpayer will also be able to approach authorities in advance for a ruling on their potential tax liabilities, Mukherjee proposed.
• An independent member would be in the GAAR approving panel, while one member would be an officer of the level of Joint Secretary, or above, from the Ministry of Law.
• A committee would be constituted under the Chairmanship of the Director General of Income Tax, with the task of providing recommendations by May 31 for formulating the rules and guidelines to implement GAAR provisions.
• On the proposed retrospective amendment in tax rules, Mukherjee said the changes will not override the provisions of double-tax avoidance treaties India has with 82 countries.
• The retroactive changes will only impact those cases where a deal has been routed through low-tax and no-tax countries with whom India does not have tax treaties.
• The proposed retrospective changes in tax rules will not be used to reopen cases where assessment orders have already been finalised, Mukherjee said.
• Mukherjee proposed to reduce long-term capital gains tax on private equity firms on the sale of unlisted securities to 10 percent, from 20 per cent currently, and bring the tax rate in line with what is charged from foreign portfolio investors.
• The finance minister also proposed to cut the withholding tax to 5 per cent from 20 per cent currently on funding through foreign loans for “all businesses.” The budget in mid-March had proposed a lower withholding tax for some sectors.
• Mukherjee proposed to extend the tax exemption on long-term capital gains related to the sale of unlisted securities in an initial public offering. The levy of the Securities Transaction Tax would be levied at the rate of 0.2 per cent on the sales of unlisted securities.
• Finance Ministry sources told NDTV on Thursday that there is no indication of GAAR being dropped, as it will mean changes in the Finance Act.
• The ministry put out a comprehensive draft of new guidelines for General Anti-Avoidance Rules on Thursday. Releasing the draft guidelines, the finance ministry committee stated that non-resident investors of FIIs will be exempt from the rules, and also called for a monetary threshold from which GAAR will be implemented.
• According to the draft, GAAR will come into effect from April 1 2013. According to the guidelines, FII not opting for treaty benefits and ready to pay taxes will not come under GAAR, but those who do opt for dual taxation avoidance agreements will come under its purview. (Source: NDTV Profit)

The Prime Minister on July 13 approved the constitution of an Expert Committee on GAAR to undertake stakeholder consultations and finalise the guidelines for GAAR. This committee would manage the consultation process and finalise the draft GAAR Guidelines.

The Expert Committee consisting of:

1)      Dr. Parthasarathi Shome – Chairman

2)      N. Rangachary, former Chairman, IRDA – Member

3)      Dr. Ajay Shah, Professor, NIPFP – Member

4)      Sunil Gupta, Joint Secretary, Tax Policy & Legislation, Department of Revenue – Member

The Committee will work to the following time schedule:

• Receive comments from stakeholders and general public till end-July 2012
• Vet and rework the guidelines based on this feedback and publish the second draft GAAR guidelines by 31 August 2012
• Finalise the GAAR guidelines and a roadmap for implementation and submit these to the government by 30 September 2012.

The First Draft

The Union Finance Ministry put out the first draft guidelines on General Anti-avoidance Rules (GAAR) on June 28. In a bid to allay fears of investors, the draft clarified that only income accruing after 1 April 2013 will be subject to the provisions of the general anti-avoidance rules (GAAR). This essentially indicates that GAAR would not apply with retrospective effect to taxpayers’ income, as feared by many investors.

The Draft guidelines has recommended an income threshold for the rules to be applicable, but left it undefined. The guidelines also put a time limit of 60 days for the assessing officer, in the event of a dispute, to approach the approving panel.

These safeguards are being inserted after consultations between the committee chaired by the director general of income tax (international taxation) and all tax stakeholders.

In a move that could potentially please the stock market, the draft has proposed to keep foreign institutional investors subjecting themselves to India’s income tax laws outside the purview of GAAR.

Draft rules clarify that provisions of GAAR would not be invoked on non-resident investors of foreign institutional investors.

According to the guidelines, FII not opting for treaty benefits and ready to pay taxes will not come under GAAR, but those who do opt for dual taxation avoidance agreements will come under its purview.

The guidelines say the rules will apply only above a certain monetary threshold to give relief to small taxpayers. All action under GAAR will be time bound, and a three-member panel will ensure that only genuine cases are taken up.

The draft rules clarify that if a foreign institutional investor pays tax in accordance with the domestic laws then GAAR will not be invoked against the FII and its nonresident investors.

But if an FII decides to take the benefit of a tax treaty India has with another country then GAAR provisions may be invoked in the case of that FII but its non-resident investors will be spared. This means that those investing in India through participatory notes will not face action under GAAR.