The guidelines also propose that the GAAR should only apply to the part of an arrangement that is deemed to be an impermissible avoidance arrangement and not the whole transaction.
However the committee responsible for the guidelines rejected representations from two groups of foreign institutional investors concerning what types of transactions the GAAR should apply to and the introduction of a new flat tax on gains.
The guidelines, which came out today, were drawn up by a group set up in February that was charged with producing recommendations to implement the GAAR provisions and a circular to ensure that they are not applied indiscriminately in every case.
The seven-person committee made three proposals for inclusion in the guidelines:
- A monetary threshold for the GAAR to be invoked, that is, the tax benefit of the arrangement should be above a figure that the committee did not specify. This would avoid the indiscriminate application of the GAAR and provide relief to smaller taxpayers.
- Prescribed statutory forms, which would help to ensure natural justice and transparency. These forms would be for the assessing officer to make a reference to the commissioner; for the commissioner to make a reference to the Approving Panel and for the commissioner to return the reference to the assessing officer.
- Time limits, which would promote absolute certainty:
- the commissioner of income tax would have 60 days from the receipt of the objection from the assessee to make a reference to the Approving Panel;
- if the commissioner of income tax decided to accept the assessee's objection and deemed that the GAAR do not apply, he would also have 60 days to communicate this to the assessing officer; and
- the commissioner of income tax would not be able to take action if more than six months had passed from the time they received the reference.
The committee made three recommendations on the establishment of the Approving Panel, including that, in the beginning, there should be only one, which should be full-time and be in Delhi, and should consist of two members at the level of chief commissioner of income tax and the other should be an officer of the level of joint secretary or above from the Ministry of Law.
Position of foreign investors
On special provisions for foreign institutional investors, the committee said it had meetings with the Asia Securities Industry & Financial Markets Association and Capital Markets Tax Committee of Asia. These groups had recommended that capital markets transactions should be exempt from the GAAR and that a new flat tax on FII's gains that would not distinguish between any transactions should be introduced. However, neither of these was permitted under the Income Tax Act, the committee said.
The committee was more positive about a third recommendation from the two FII groups that centred on clarification of each provision of the GAAR. It recommended that where an FII decided to subject itself to the domestic law and not take any benefits of a tax treaty between India and another jurisdiction, the GAAR should not apply. But they should apply to the FII, but not to its non-resident investors, if it
decides to take the treaty benefit.
The committee also recommended that where a specific anti-avoidance rule is applicable, the GAAR should be not employed, but there could still be a need to use it if a specific rule was unable to deal with "an exceptional case of abusive behaviour".
The guidelines include 21 examples of situations that highlight questions about whether the GAAR should apply.
After the release of the guidelines, the Ministry of Finance issued another statement to say that they had been released for discussion only and that prime minister Manmohan Singh, who also took on the finance minister's role this week, had yet to see them. He will take the final decision on the guidelines after receiving further feedback.
The draft GAAR guidelines will also be discussed at International Tax Review's third annual India Tax Forum in Delhi on September 5 & 6.
Confirmed speakers include: RN Dash, ex-Director General of Income Tax (International Taxation), Government of India; Girish Srivastava, ex-Director General of Income Tax (International Taxation), Government of India; Mohan Parasaran, Senior Advocate, Supreme Court of India and Additional Solicitor General of India; Prashant Bhatnagar, head of India tax, Procter & Gamble; and R Mani, head of India tax, Tata
The foremost Indian tax specialists will tackle this issue and more. It is a unique opportunity to hear their views, increase your understanding of the upcoming changes and how best to prepare for the future.