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GAAR needs more explanation, India forum told

Indian taxpayers believe the introduction of a general anti-avoidance rule is a necessary and positive step but want more clarity if it has to come in, as scheduled, at the same time as the new Direct Taxes Code (DTC) next April.

Speaking at International Tax Review’s India Tax Forum in Delhi today, Ketan Madia, vice-president of taxes for GE, also questioned whether India is ready for the general anti-avoidance rule in April 2012.

“There should definitely be a GAAR but, should its introduction be more long-term?” he asked. “Should we learn from other countries? I don’t dispute a GAAR should be introduced, just maybe not yet.”

Taxpayers are concerned about how the GAAR will apply, for example, the extent to which a merger will constitute a legitimate commercial reason or to what extent it will be considered as solely for tax reasons.

Madia also emphasised that the GAAR will mean the end of the Mauritius tax treaty.

“[There is a] need to keep in mind, when a large multinational decides on an investment vehicle, whether that answer has to take into account tax benefits. If Mauritius is the decision for the location of that investment vehicle, will GAAR be invoked?” Madia said.

“I recommend, if GAAR is introduced, there should be an independent panel that should clear GAAR cases, like in Australia, with independent experts. It should not be assumed that the dispute resolution panel is the best way,” added Madia.

Pallav Gupta, head of tax for ITC, emphasised the aggressive intentions of officials in using the GAAR, saying that every official he has spoken to intends to apply it in all areas of tax.

“It is more than just transfer pricing,” said Gupta. “Every area will be examined. A high level of maturity is required. Some officers can be very vindictive, I’m sorry to say.”

Vijay Mathur, an adviser with PwC, proposed a clarification on language of the GAAR provisions. He said the GAAR should be triggered when the motivation for a merger or restructure was solely for tax benefits, rather than mainly for tax benefits.

“So,” said Sunil Gupta, joint secretary for tax policy and legislation at the Ministry of Finance for India, “all panelists agree there should be a GAAR, but, how it is structured and when it is implemented has created differences [of opinion].”

“The GAAR is being applied in a number of major countries. The issue comes when [you consider] how to provide comfort to taxpayers. There has been some aggressive tax planning and we want to check on that.”

Sunil Gupta said the government is keen to hear more suggestions on the GAAR and the DTC from taxpayers and encouraged delegates to contact officials.

The panellists in the opening session of the conference, which covered the DTC, said it is important for the government to clarify when the new direct tax system comprises a change in language and when it comprises a change in policy.

The conference continues tomorrow at the Taj Mahal Hotel.

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