GAAR, POEM to come into effect from April 1: Government

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New Delhi | Published: February 2, 2017 9:33:27 PM

The Tax department feels that the adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies and the same are required to be tackled through domestic anti-avoidance rules.

The threat of retrospective application of GAAR, say some analysts, also exists for M&A cases as acquisition of shares in mergers and de-mergers are not grandfathered even if the original shares are bought prior to April 1, 2017, the cut-off date.The threat of retrospective application of GAAR, say some analysts, also exists for M&A cases as acquisition of shares in mergers and de-mergers are not grandfathered even if the original shares are bought prior to April 1, 2017, the cut-off date.

Rules for anti-tax avoidance and place of effective management are “here to stay” and will be implemented from April 1, the government today said emphasising the rules have been delayed long enough and can not be deferred any more. While Place of Effective Management (POEM) requires foreign firms to pay taxes in India if the effective control of business lies within the country, General Anti-Avoidance Rules (GAAR) seeks to prevent companies from routing transactions through other countries to avoid taxes. “GAAR and POEM are here to stay… now there is no question of going back on it. GAAR has been postponed for last 5 years. We can’t postpone it any more,” Revenue Secretary Hasmukh Adhia said at a post-Budget seminar here.

The Tax department feels that the adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies and the same are required to be tackled through domestic anti-avoidance rules. “I really wonder why we are scared of POEM. POEM is not for Indian companies doing genuine business outside. It is for those companies which are creating structures outside the country, mainly to get passive income from stocks and investments,” he said. POEM requires foreign companies in India and domestic firms with overseas subsidiaries to pay local taxes based on where the business is effectively controlled but will not apply to companies having a turnover or gross receipts of Rs 50 crore or less in a financial year.

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This would help target shell companies, or holding companies, incorporated overseas to evade taxes by showing their residency as a tax haven even though the management and effective decision-making takes place in India. POEM will not apply to those overseas companies of an Indian promoter that get passive income outside the tax net of India. POEM guidelines make it clear that if you have got active business outside India, POEM will not apply, Adhia said. Explaining further he said if out of the total income, 51 per cent comes from active business outside India, and even if 49 per cent comes from passive business — then also POEM will not apply. “Your place of effective management will not be in India, it will be in other country,” he said.

Adhia added the industry should promote POEM so that evasions are stopped. “There is no question of deferring POEM, we have issued clarification.”
Under GAAR, the taxmen may potentially want to know whether the transaction was done in the normal course of business or conducted simply with the intention to avoid taxes. India will be the 17th nation in the world to have the law that aims to fix tax loopholes.

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