Sources said the finance ministry has decided to make this key change after discussions with FIIs. The taxpayer will be considered innocent till a strong case is made out against him. The onus for proving that an impermissible arrangement exists in order to invoke provisions of GAAR will be on the assessing officer.
This clarity will eliminate a key source of discretion available to the tax officers and address, to a large extent, concerns raised by FIIs.
GAAR rules will come into effect for assessment year 2013-14 onwards and the rules will be framed after passage of Finance Bill. Finance secretary RS Gujral has said that only "impermissible arrangements" would be subject to GAAR provisions, and the government does not plan to tax honest FIIs.
"It shall be presumed that obtaining of tax benefit is the main purpose of an arrangement unless otherwise proven by the taxpayer," as per the Budget papers.
The Finance Bill is expected to be amended suitably to reflect the changes and to address the concerns of FIIs, official sources said. The GAAR committee in the finance ministry is expected to spell out these changes. The ministry will also approve a scheme for regulating the condition and the manner of application of GAAR provisions by tax officers.
Fearing imposition of GAAR, which could subject FIIs operating through tax havens such as Mauritius to short-term capital gains tax, foreign investors have started trimming their portfolio, both in equities and debt, in India.
"A lot of concerns would be addressed if the onus is shifted to tax authorities to prove evasion. That would be a desirable move. Even the Standing Committee on Finance has recommended it," said Ernst & Young tax leader Sudhir Kapadia.
Standing Committee on Finance chairman and senior BJP leader Yashwant Sinha has criticised the government for GAAR rules, and said that these empower the income-tax department to harass taxpayers.
"The standing committee has given its recommendation for GAAR with safeguards so that revenue department did not have power to harass taxpayers. However, the finance ministry has gone ahead with its own version of GAAR," Sinha had told FE.
The GAAR provisions were originally part of the Direct Taxes Code. Finance minister Pranab Mukherjee, however, announced these as part of the Budget 2012-13, ostensibly to protect central revenues. Mukherjee said the government wanted to introduce GAAR in order to counter aggressive tax avoidance schemes, without harassing the honest investors and taxpayers. Under GAAR, any arrangement made between the entities to deliberately avoid tax can be invalidated and would be brought under tax net.