FM Postpones GAAR Implementation by 2 Years to FY 2015-16

Giving a big relief to overseas investors, the government has postponed implementation of controversial GAAR provisions by two years to FY 2015-2016.

Having considered all the circumstances and relevant factors, the government has decided that provisions of Chapter 10A of the Income Tax Act (dealing with GAAR) will come into force from April 1, 2016 as against April 1, 2014," 

General anti avoidance rules (GAAR) is a set of general rules enacted so as to check the tax avoidance. Tax Avoidance is an area of concern across the world.  The rules are framed in different countries to minimize such avoidance of tax.  Such rules in simple terms are known as “General Anti Avoidance Rules” or GAAR. 

Anti Avoidance Rules are broadly divided into two categories namely "General" and "Specific".   Thus, legislation dealing with "General" rules are termed as GAAR, whereas legislation dealing with "Specific avoidance are termed as "SAAR"

In India till recently SAAR was in vogue i.e. laws were amended to plug specific loopholes as and when they were noticed or were misused.

However, now Indian tax authorities wants to move towards GAAR but are facing severe opposition as tax payers fear that these will be misused by tax authorities by giving arbitrary and wide interpretations.

We can say SAAR being more specific provides certainty to taxpayers where as GAAR being general in nature can be misused and is subject to arbitrary interpretation by tax authorities.

In India, the real discussions on GAAR came to light with the release of draft Direct Taxes Code Bill (popularly known as DTC 2009).

The proposal for GAAR was introduced in the 2012-13 Budget by then-finance minister Pranab Mukherjee as part of the drastic measures to check tax avoidance by overseas investors.

The decision to postpone the implementation, follows the recommendations of the Shome Committee which was set up by Prime Minister Manmohan Singh in July last year to look into investor concerns.

The government has accepted major recommendations of the panel with some modifications.

• The GAAR provisions, would override the double taxation avoidance agreement (DTAA) benefits if the arrangements were intended solely to evade taxes.

• Foreign Institutional Investors (FII) are excluded from the provision of GAAR in cases where they do not avail of benefit of double tax avoidance agreement India has with other nations. It also made explicit that if an FII derives benefits of a double – taxation treaty, GAAR will override the treaty.

• It is necessary for developing countries like India to protect its revenue. But at the same time, it is also important to provide a fair, just, stable and non-discriminatory tax regime. It is tried to strike a balance between the interest of investors and the revenue department with the introduction of GAAR. 

• No investor should now have any apprehension about his investments in India. Only those arrangements, which have been made for the purpose of tax avoidance, will be brought under GAAR, he added.

• Investments made by Non-Resident Indians (NRIs) will not be covered by the provisions of GAAR.

• Only those arrangements which are aimed at only obtaining tax benefit would be considered as 'impermissible arrangement' and would attract GAAR. 

•  As per the original GAAR provisions under Chapter 10 (A) of Finance Bill, 2012, the anti-tax avoidance provisions could be invoked "if one of the purposes" was to obtain tax benefit.

• There would be a threshold limit of Rs 3 crore of tax benefit for invocation of GAAR, as suggested by the Shome panel.

• Moreover, the investments made before August 30, 2010, would not attract the provisions of GAAR.

• Tax officials can look into cases between August 30, 2010, and the date for implementation of GAAR, but in order to go, they have to comply with a number of provisions in the I-T Act. If the assessment is completed, they can reopen the assessment only after very strict circumstances. 

• The government has taken the decision of modifying GAAR provisions after considering the matter for "over three months and 14 days" and the requisite amendments would be made in the I-T Act as part of the Finance Bill to be introduced in the Lok Sabha on February 28. 

• Under the modified norms, the tax official would issue show-cause notice, with reasons, for invoking GAAR provisions and will also have to give an opportunity to the assessee to explain whether the arrangement was 'impermissible' or not. 

• The Approving Panel, as proposed in GAAR provisions, would be headed by a serving or a retired High Court judge and its member will include senior officials of the revenue department and individuals with knowledge of tax matters and international tax practices. 

• The effort, would be to ensure that the same income is not taxed twice either in the same year or different assessment years. 

• Application of GAAR will be restricted to the tax consequences on that part which is impermissible and not to the whole arrangement. 

• GAAR and SAAR (Specific Anti-Avoidance Rules) would not apply simultaneously. Only one of them will apply to a given case and the guidelines will be made regarding the applicability of one or the other. 

• There would be time limits for applications of various provisions under the GAAR. Assessees would also have the option to seek opinion from the Authority for Advance Rulings (AAR) whether an arrangement is impermissible. 

Regards

CA. Mona Singhal

Partner

Arpit Gupta & Associates

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