NEW DELHI: The government on Monday proposed to defer by a year its plan to bring a general anti-avoidance rule (GAAR) to crack down on foreign investors creating legal structures without commercial substance to avoid paying tax in India.
In a relief for foreign investors who fled Indian markets fearing the adverse fallout of GAAR on “Mauritius-based” investors, the government also said that when it comes to invoking the rule, the onus of proof will lie with the tax authorities and assured a transparent and objective regime.
Finance minister Pranab Mukherjee said while moving the amendment to the Finance Bill, 2012, for consideration of Parliament that the GAAR rules would apply only from the financial year 2013-14 when the Direct Taxes Code is likely to take effect. There will be safeguards to ensure that GAAR provisions can’t be used indiscriminately, he said, adding the taxpayer could also get an advance ruling on whether the arrangement she proposed to have could attract GAAR.
The plan to introduce GAAR a year before the DTC and the perceived aggressive stance the government seemed to take on taxation of foreign investors in the context of certain retroactive amendments proposed in the Finance Bill, has scared away foreign institutional investors from the Indian market. Against R43,951 crore of FII investment inflows during January-March this year, there was an outflow of about R1,300 crore in April.
Following the announcement, the rupee hit a six-week high while the benchmark 30-share Sensex gained 81.63 points or 0.48% to close at 16,912.71 points, recouping losses in the morning session when the index had shed around 300 points.
The rupee rose 1.08% against the dollar, its biggest daily gain since March 27, to settle at 52.90 on Monday.
Tax experts welcomed the government’s move to defer GAAR. Said J Sagar Associates tax partner Sunil Jain: “It will give a window to (Mauritius-based) FIIs to gradually withdraw their holdings from India. The facility of advance ruling will give certainty to FIIs.” Ernst & Young tax partner Samir Kanabar said appointing an independent member on the GAAR panel as announced by Mukherjee, would be of great help as her views would be unbiased. The deferment of GAAR by one year will give more time to FIIs to reorganise themselves.
Industry body Ficci president RV Kanoria said: “I hope it is not merely a postponement but hope that a more realistic GAAR will be introduced.”
The GAAR provisions, based on the “substance over form” doctrine, will allow Indian tax authorities to go behind the legal structures created by foreign investors to invest inIndiadespite protective tax treaties (like the India-Mauritius treaty) and check if these structures lacked “commercial substance”. If the arrangement is found to be merely to camouflage the real purpose and avoid tax on capital gains, the investor could practically be deprived of the treaty benefit.Indialevies a short-term capital gains tax of 15% on listed securities while there is no tax on long-term gains.
Last month, many global investors including heavyweights including Goldman Sachs, Morgan Stanley, JPMorgan, CLSA and Credit Suisse met finance secretary RS Gujral to express their concerns on GAAR and they wanted it to be deferred by at least one year or scrapped. “With Monday’s clarifications, I’m hopeful the GAAR legislation and rules will be debated among all stakeholders before they are implemented,” said Mukesh Butani, chairman, BMR Advisors.
Besides deferring it by one year, Mukherjee has also announced a slew of measures at the beginning of discussion on the Finance Bill. He said there would be an independent member in the GAAR approving panel to ensure objectivity and transparency. “One member of the panel now would be an officer of the level of joint secretary or above from the ministry of law,” he added.
The government has also announced to form a committee under the director-general of income tax (international taxation) to give recommendations for formulating rules and guidelines for implementing GAAR provisions. The committee will submit its recommendations by the end of this month.