12/1/2017 296 Economic Affairs | Fiscal system | View Recent Current Affairs
- The tax department has clarified that tax anti-avoidance rule GAAR, which was originally to be implemented from April 1, 2014, will now come into effect from April 1, 2017.
- General Anti-Avoidance Rule (GAAR) was part of the 2012-13 Budget speech of the then Finance Minister Pranab Mukherjee to check tax evasion and avoidance. However, its implementation was repeatedly postponed because of the apprehensions expressed by foreign investors. It contains provision allowing the government to prospectively tax overseas deals involving local assets.
- GAAR is basically a set of rules designed to give Indian authorities the right to scrutinize and tax transactions which they believe are structured solely to avoid taxes. The rules would be applicable to all taxpayers.
- Throughout the world, companies often structure their businesses and investments in ways that saves them taxes. Many large U.S. companies, for instance, park their profits outside the country so that they don’t have to pay a higher U.S. corporate tax rate.
- If GAAR starts in India, any transaction that carries a tax benefit could be questioned. The taxman may potentially want to know whether the transaction was done in the normal course of business or conducted simply with an intention to avoid taxes.
- Some of the hardest hit by the new rules could be money managers who invest in India via tax havens like Mauritius. Since Mauritius has a double-tax avoidance treaty with India, investors who trade Indian securities through their Mauritius units don’t have to pay India’s high capital-gains tax. If GAAR comes into place, it would override the tax treaty and some investors that created shell companies in Mauritius will be exposed to paying more taxes.
- To avoid double taxation, the investment company will have to show it has “commercial substance” in the country it is trading through. This could involve showing that the company has a large staff in Mauritius or that it conducts business meetings there and makes investment decisions from there.
- Historically, while indeed there have been several Specific Anti-Avoidance Rules (SAARs) in its tax law, India did not have a codified GAAR and most anti-avoidance principles were based on judicial precedents. The introduction of GAAR in India’s Income Tax Act, 1961 (ITA) impacts decades of jurisprudence and could also impact existing investment and operating structures.
- However, GAAR, by its very nature, has the potential of leading to significant uncertainty and litigation. It therefore, becomes critical to put in place adequate safeguards to ensure that GAAR will be applied objectively, judiciously and in a fair, consistent and uniform way.