The guidelines propose that rather than applying to the entire transaction, GAAR should be applicable only to the part that is considered an impermissible avoidance arrangement.
To ensure consistency and avoid indiscriminate application, the guidelines suggest a monetary threshold should be put in place for GAAR to be invoked. However, no threshold was specified.
The committee also proposes implementing time limits for completing the GAAR process so that resolution can be achieved in a timely manner. The committee “feels there should be absolute certainty about the time limits during which the various actions under the GAAR provisions are to be completed” and therefore advocates a 60 day response time for each stage of the process.
It also stated that “no action shall be taken by the Commissioner after the period of six months from the end of the month in which the reference was received by the Commissioner”.
The following special recommendations were made in relation to the treatment of foreign institutional investors (FIIs):
- The committee recommends that the GAAR provisions not apply to FIIs when their tax treatment is based on Indian domestic law and not on a beneficial tax treaty.
- However, GAAR should not be invoked against non-resident investors of the FII regardless of whether the FII has claimed any tax treaty benefits.
The committee had discussions with the Asia Securities Industry & Financial Markets Association and Capital Markets Tax Committee of Asia, during which the groups proposed that capital markets transactions be exempt from GAAR and that a flat tax on FII’s gains be introduced. Both of these proposals were rejected, with the committee saying they were not permissible under the Income Tax Act.
There have been mixed reactions to the draft guidelines, with Mukesh Butani, partner at BMR, saying they do not contain anything surprising, but that there are “some misses and some good [recommendations]”.
“The recommendations appear to permit scenarios of tax mitigation, which are distinguished from tax avoidance transactions,” said a PwC alert, which also welcomed the fact that application would not be retroactive. “It is also a positive recommendation that GAAR should apply only to income accruing or arising on or after April 1 2013.”
Butani believes there is still a need for further progress on the issue, though, before GAAR may be implemented.
“Let’s say this is a decent first draft,” he said. “There is a lot of work [still] to be done.”
He said more consultation is required, and that there needs to be clarification as to the capacity of GAAR to override treaty provisions.
“The guidance needs wider debates,” said Butani. “A fundamental issue is that the treaty provisions should not be overridden by GAAR. If they are, there should be specific instances.”
This issue could also have implications for the India-Mauritius tax treaty, though uncertainty remains with regards to this.
“Since the amended GAAR provisions shift the onus to prove tax evasion to the authorities, the government may want to negotiate a limitation of benefits clause with Mauritius instead of negotiations of a wholesome manner,” said Amit Singhania, principal associate at Amarchand & Mangaldas.
While the authorities would find it useful in increasing the number of tools they have at their disposal, whether a renegotiation is necessary – or likely – is still in doubt.
“The need for revision of the treaty is not required now, as the tax authorities – after the introduction of GAAR – will have enough powers to deny treaty benefit to taxpayers that fail to prove the substance of the transaction,” said Singhania.
The final guidelines may be slightly different from those outlined by the committee, with the next steps including a two week period for response.
“There is a 15 day window for reaction. It would be debated by the Department of Revenue before issuance,” said Butani.
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.