The government on Friday issued the provisions of General Anti Avoidance Rule (GAAR) contained in Chapter X-A of the Income Tax Act, 1961, with the provisions effective from the assessment year 2018-19 onwards, i.e. financial year 2017-18.
The government on Friday issued the provisions of General Anti Avoidance Rule (GAAR) contained in Chapter X-A of the Income Tax Act, 1961, with the provisions effective from the assessment year 2018-19 onwards, i.e. financial year 2017-18. Central Board of Direct Taxation (CBDT) issued the clarifications, saying that GAAR would not apply for foreign investors based in a jurisdiction for genuine commercial reasons while saying investors meeting key conditions of individual tax treaties would not be subject to GAAR.
Reacting to this, Naveen Aggarwal, Tax Partner, KPMG in India, said, “The implementation of GAAR is well intended and addresses a number of key issues the industry was seeking clarification on. However, the real test will be the on-ground implementation of assured safeguards. An effort has been made to address the dispute in application between domestic GAAR and Limitation of Benefits (LoB) in tax treaties. The notification leaves the issue subjective by stating that if a case of avoidance is sufficiently addressed by LoB, then GAAR would not be invoked. Adequate safeguards have been put in place as GAAR will be vetted first by the Principal Commissioner of Income Tax / Commissioner of Income Tax and at the second stage by an Approving Panel headed by a High Court judge.”
Last year while presenting the Budget in Parliament, Finance Minister Arun Jaitley had said, “Dividend Distribution Tax (DDT) uniformly applies to all investors irrespective of their income slabs. This is perceived to distort the fairness and progressive nature of taxes. Persons with relatively higher income can bear a higher tax cost. I, therefore, propose that in addition to DDT paid by the companies, tax at the rate of 10% of gross amount of dividend will be payable by the recipients, that is, individuals, HUFs and firms receiving dividend in excess of Rs 10 lakh per annum.”
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Speaking on DDT, Aggarwal said, “When DDT came out first the tax rate was roughly around 10%, now the rate has gone to over 20%. Compare that to corporate tax, the government is planning to get that down from 30% to 25% in a span of 4 years, and it might do something in this year’s budget. One would hope some reduction would happen in the DDT rate in this year’s budget.”
“Multi-layered holding structures are quite common in the corporate world, there have been certain tweaks made through the years to try and reduce the pain for companies so as to ensure that there is no multiple layer of taxation or there is cascading effect of DDT. However, this issue has not been addressed so far and what happens is in certain situations where the holding company, for instance, holding more than 50% in the operating company receives a dividend from a subsidiary in the same fiscal year, then there are challenges in claiming credit in terms of exemption. This should be put to rest,” added Aggarwal.