The ministry, sources said, would clarify soon that GAARs incorporated in the Income Tax Act in 2012 would be invoked only as a last resort if there is no other provision in law that can be used to question a dodgy business arrangement aimed at saving tax. Also, the threshold for tax benefits, under an arrangement for tax officials to invoke GAARs, may be raised significantly from the current R3 crore.
Sources said tax symmetry may be offered in GAAR-enabled income adjustment which would mean that the same amount was not taxed twice, that is, in the hands of both parties to a transaction.The ministry is also likely to enlist clear examples of business arrangements where GAARs would be applied.
The idea is to make enough changes in the anti-avoidance provisions in the Income Tax Act and the I-T Rules to foil abusive tax arrangements, even while allowing a firm the freedom to do responsible tax planning, the sources added. The finance minister will review all aspects of GAARs, not just its date of implementation. It is a comprehensive review, the minister of state for finance, Nirmala Sitharaman, told FE.
Former finance minister P Chidambaram too had made a promise to the effect that GAAR would be used sparingly but subsequent changes in rules, industry and analysts said, hardly reflected that assurance, although the then minister had accomodated certain safeguards to reduce the rigours of GAAR.
GAARs are intended to prevent businesses from reducing tax liability through legal loopholes and arrangements that are legal in letter but not in spirit. These rules empower the taxman to lift the corporate veil of the tax payer and re-characterise transactions if needed.
Sources said the threshold of tax benefits for GAARs was being reviewed as even small-scale enterprises could have transactions with tax implications above the present Rs 3-crore limit while GAARs are essentially aimed at avoiding large evasions. Experts FE spoke to said the threshold should be somewhere between Rs 10 and 25 crore.
The government could incorporate more of the suggestions given by the Shome Committee and industry to make GAAR more balanced,said Rahul Garg, leader, Direct Tax Practice, PwC India. He said that tax payers could be allowed to secure advance rulings on whether a proposed transaction could attract the tax anti-avoidance provisions.
The Shome Committee recommendations which comprehensively dealt with the implementation of GAAR should be accepted by the government in to considering the far reaching nature of these anti-abuse rules and our history of disputes in other areas of taxation, specially in transfer pricing, said KR Sekar, partner, Deloitte Haskins & Sells.
He said that GAARs should be sparingly used and be guided by an independent committee, members of which should not have a revenue bias. Besides, court-approved business restructures have to be kept outside GAAR purview in line with the Shome Committee recommendations, said Sekar.
GAARs allow officials to lift the corporate veil of a tax payer and investigate whether a business arrangement is on an arms length basis and has commercial substance. If found to be an impermissible arrangement that is only legal in its form and the main purpose of which is to obtain a tax benefit, then the tax benefit sought can be denied.
GAAR would override provisions in tax treaties. Once it came into force, the tax department, for instance, could ask Mauritius-based entities investing in listed securities in India whether they were shell companies meant to avoid the 15% short-term capital gains tax in India or are genuine businesses that want to participate in the Indian economy.
There is a thin line between tax avoidance and legitimate tax planning, which involves organising ones affairs in a way to reduce tax liability. Also, there is overlap between permissible and impermissible tax avoidance. Tax evasion on the other hand, involves suppression of facts and involves illegal means.
Implementation of GAAR should boost confidence amongst Industry and hence rules and administration of GAAR should be in line with recommendations of the Shome Committee, said Sekar.
GAAR : No tax benefit to business arrangements legal in form but not in substance
Aug 12, 2009 : Chidambaram proposes GAARs in Direct Taxes Code first discussion draft in 2009
Aug 30, 2010 : Direct Taxes Code Bill 2010 in Parliament formally proposes GAAR
March 16, 2012: Pranab Mukherjee announces inclusion of GAAR in Income Tax Act
Feb 28, 2013 : Chidamaram proposes deferring GAAR to FY16 from FY14 in Finance Act 2013
Jan 2013: Chidambaram accepts Shomes suggestions to relax GAAR
Sept 2013 :GAAR notified with R3-cr threshold. Investments made before Aug 30, 2010, grandfathered
July 25, 2014 : Jaitley promises in Lok Sabha to review GAAR