Defer GAAR till 2016-17: Shome panel

By | September 2, 2012

Foreign investors have been offered long-term certainty in tax laws, including postponement of the controversial general anti-avoidance tax rules (GAAR) until at least 2016-17.

A committee set up by Prime Minister Manmohan Singh to examine all aspects of taxation of foreign investors has also recommended that tax certificates issued to them by the Mauritius government should be accepted at face value by Indian revenue authorities.

For investments from Singapore and elsewhere, the benefits offered by India through bilateral treaties should supersede domestic tax laws.

Over 44 per cent of foreign investment in India come through Mauritius and Singapore.

For domestic investors, the committee headed by economist Parthasarathi Shome has recommended that there should be no short term capital gains tax on investment in stock markets.

The far-reaching suggestions are a response to the series of tax demands following a harsh rewrite of the Income-Tax Act by former finance minister Pranab Mukherjee in this year’s budget. Foreign investment in India had collapsed.

The PM had promised to examine tax issues through the panel. Finance Minister P Chidambaram subsequently expanded the committee’s scope to look into all aspects of foreign investment in India.

The draft report submitted by the committee today made a slew of recommendations to boost investor sentiment. It said that all existing investments involving a question of taxation of overseas entities should be ‘grandfathered’, meaning that their tax arrangements will not be re-opened for scrutiny.

While industry bodies like Ficci welcomed the report, Shyamal Mukherjee, executive director at PwC said a lot will depend on the government’s implementation of the report. “The report tells the world this is how we aim to treat taxation of foreign investment in the long run,” he said.

The panel suggested a high monetary threshold of Rs 3 crore of tax benefits for invoking GAAR. “GAAR is an extremely advanced instrument of tax administration — one of deterrence, rather than for revenue generation — for which intensive training of tax officers, who would specialize in the finer aspects of international taxation, is needed. Hence GAAR should be deferred for 3 years,” the panel said.

“But the year, 2016-17, should be announced now. In effect, therefore, GAAR would apply from A.Y. 2017-18.” The panel argued that it was international best practice to announce a tax provision a few years before it is implemented.

The committee, which has sought comments on its report from stakeholders by September 15, has said that the I-T Act should be amended to provide that only arrangements which have the main purpose — and not one of the main purposes — of obtaining tax benefit should be covered under GAAR.

The draft report said that countries like Singapore, which have the limitation of benefits clause in the double taxation avoidance agreement with India, will also not be impacted by GAAR.
The expert committee on General Anti Avoidance Rules (GAAR) today recommended postponement of the controversial tax provision by three years and abolition of capital gains tax on transfer of securities.

As a step towards reassuring global investors, the Committee in its draft report, suggested that GAAR provisions should not be invoked to examine the genuineness of the residency of entities in Mauritius.

Mauritius is the most preferred route for foreign investments because of the liberal taxation regime in the island country. India has a double taxation avoidance treaty with Mauritius.

The Committee, headed by Parthasarathi Shome, has recommended that GARR be applicable only if the monetary threshold of tax benefit is Rs 3 crore and more.

The draft report, which was submitted to the Finance Ministry, has also sought comments from the stakeholders by September 15. The Shome Committee was set up by Prime Minister Manmohan Singh to address the concerns of foreign investors.

Meanwhile, the Finance Ministry has also expanded the scope of the terms of reference of the committee to include all non-resident tax payers instead of only FIIs.

The draft report of the Shome committee said: “…GAAR should be deferred for 3 years. But the year, 2016-17, should be announced now. In effect, therefore, GAAR would apply from assessment year 2017-18. Pre-announcement is a common practice internationally, in today’s global environment of freely flowing capital”.

In view of widespread concern by foreign investors, the Government had earlier postponed implementation of GAAR, which was introduced by the then Finance Minister Pranab Mukherjee in his Budget for 2012-13 to check tax evasion.

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