Foreign and Indian multinationals could face a tough time ahead with India?s anti-avoidance provisions in the Direct Taxes Code Bill clearly listing the conditions under which a company or individual is likely to be booked for abuse of tax laws.
The new tax code will come into effect from April 2012.
Some of the conditions are ? no disallowance of expenditure which is excessive and unreasonable, income from international transaction will be determined only as per the arms length price and the arms length price will be determined by the appropriate method. In fact, the Bill also clearly mentions that general anti avoidance rules, branch profit tax and CFC rules will apply to the assessee irrespective of the fact the rule is beneficial to him or not. In other words, the tax treaty between the two nations would hold no meaning where GAAR has to be invoked.
Experts, however, feel that the rules and the threshold limit for imposing such a rule have still not been framed by the Central Board of Direct Taxes (CBDT) and that has left the corporates thinking about how transparent the laws would be.
The regulations for certain things involving GAAR need to be worked out. For instance, who among the tax officials would be in the capacity to invoke GAAR or who can send a notice to the corporates– the assessing officer or some higher tax authority has to be put in place.
?The important aspect of CBDT guidelines, the essence for the applicability of GAAR, is critical. Hence, we believe that the administrators of the law will be more transparent and also progressive in framing the guidelines and fixing the threshold limit,? KR Sekar, partner, Deloitte Haskins & Sells said.
The provisions of anti-avoidance rules may be applied in accordance with the guidelines. Further, the reference to dispute resolution panel (DRP) has also been covered in the DTC Bill. The anti-avoidance rules can be invoked if the assessee?s tax benefit is also covered by one of the other four conditions i.e. transaction not at arms length, represents misuse or abuse of the provisions of the code, lacks commercial substance or not for bonafide business purposes. Many countries have included the anti avoidance laws in their tax legislation to safeguard against the misuse of tax laws. India is the latest entrant to the list.