GAAR May Lose Bite To Soothe Investors

NEW DELHI: India is likely to take the sting out of a controversial law seeking to crack down on tax avoidance by exempting small firms and individuals and stretching out its implementation over several months, in an attempt to calm jittery foreign and domestic investors.
The finance ministry is considering exempting transactions or tax-saving arrangements less than Rs 15 crore to ensure only corporate structures of significant size come under the ambit of the new regime, known as the General Anti-Avoidance Rules (GAAR).
It is also considering implementing GAAR after several months or even in the financial year beginning April 1, 2013, a ministry official said. This will enable stakeholders to exhaustively debate the new rules, which will spell out how GAAR is to be implemented, and also enable investors to restructure their businesses to bring them in line with the changed tax code.
“There are many options on the table that are being considered. We are looking at specifying a threshold to ensure that small firms and investors don’t need to worry,” the finance ministry official added.
Officials said a final decision will rest with Finance Minister Pranab Mukherjee. If there are to be any changes, Mukherjee will announce them when he replies to the debate on the Finance Bill in Parliament in the first week of May.
A senior finance ministry official said the government had held extensive discussions with foreign institutional investors and Indian industry. The finance ministry was receptive to the idea of tweaking the rules to allay investor concerns, the official said.
GAAR, which was proposed in the budget, can deny tax benefits if a tax official feels the sole purpose of a particular arrangement is to reduce tax liability.
The rules, proposed to be implemented from April 1, 2012, have unnerved foreign investors, particularly portfolio investors who route money into the country through Mauritius to benefit from capital gains tax exemption under the India-Mauritius tax treaty. They have also provoked strong reaction from domestic industry as many feel that tax officials will question every transaction.
Some policymakers within the government are also of the view that the immediate priority is to boost the investment climate. “Such tax rules are required, but enough comfort needs to be given to investors instead of creating more uncertainty when uncertainty already prevails in the global economic situation,” a government official said.
The proposed tweaks are still being debated by finance ministry bureaucrats and no final decision had been reached, according to officials in the know.
A section of North Block is proposing that the implementation of the new regime should start from the next financial year, though others feel investors have had enough time to make adjustments as the new Direct Taxes Code had proposed these changes two years ago. Those in favour of delaying the implementation are citing the example of theUK, where a similar regime proposed by Chancellor George Osborne in the budget presented recently will be implemented next year.
“Implementing GAAR without publishing threshold and definite rules would be very harsh on investors as the financial year has already begun. It is better to have enough debate on rules and give enough notice to investors to make adjustments,” said Shefali Goradia, partner, BMR Advisors.
Opinion is also divided on whether net profit or transaction value should be considered while fixing an exemption threshold. The threshold being debated, Rs 15 crore, is also the limit beyond which a transfer pricing probe can be triggered.
“Having a threshold would be a sensible move as it would remove a plethora of cases and prevent clogging of the system at the GAAR panel level. This would not only improve efficiency of the panel, but also keep small taxpayers out,” said Sudhir Kapadia, national tax leader, Ernst & Young.
The new guidelines would put the onus on tax authorities to prove that an arrangement is impermissible, in line with the recommendations of Parliament’s standing committee on finance. The GAAR panel, a committee of senior income-tax officials that will decide if an arrangement is permissible, would also have an independent representative.
While the taxpayer would be able to appeal against the GAAR panel’s decision, tax authorities would not be allowed this option.
The new rules will also explicitly say the new rules will not lead to reopening of any case if GAAR is invoked after its implementation. This would mean that structures created prior to GAAR coming into effect would not be investigated if the structures are subsequently modified.