Battle Against Tax Avoidance Gets a Leg-up with New GAAR Rules

At long last, tax authorities in India have been equipped with the right weapon to deal with aggressive tax planners who use sophisticated structures to avoid taxes.

By notifying the rules of the GAAR framework, the taxman will now be in a good position to invalidate transactions put through Mauritius and other tax havens with the intent of deliberately avoiding tax. The general anti-avoidance rules are a set of provisions in the Income Tax law aimed at curbing tax avoidance structures.

The GAAR invocation power will be handy given that India has repeatedly drawn a blank in getting its tax treaty with Mauritius re-negotiated so as to introduce a limitation of benefit clause or do away with the capital gains tax exemption.

Come April 1, 2015, the Mauritius route may completely lose its sheen irrespective of what may happen to the treaty talks, say tax experts.

WHY NOW?

From the timing point of view, the Finance Ministry’s move to notify GAAR rules now — a good 18 months before the provisions take effect — has come as a surprise to many.

Seemingly driven by stock market considerations, the effort is part of several recent initiatives aimed at building foreign investors’ trust in India’s tax environment.

India is slowly but steadily trying to cure the wounds inflicted by certain rash tax policy actions such as the one on retrospective amendments on indirect transfer of shares.

SOFTER SIDE

Small taxpayers need not lose sleep over GAAR as it will apply in cases where the tax benefit is over Rs 3 crore.

GAAR will also not ruffle the feathers of the foreign biggies looking to make portfolio investments into India. Foreign investors parking funds in Foreign Institutional Investors (FIIs) through offshore derivate instruments such as Participatory Notes are clearly out of the GAAR net.

But the same cannot be said of FII investments that are routed through treaty countries and where treaty benefits are claimed by such investors.

Post-box companies (firms only in name) in Mauritius better watch out.

GRANDFATHERING WOES

If there is one feature of the GAAR rules that has caught the attention of tax experts, it is the one on grandfathering.

Rather than going for complete grandfathering of structures prior to April 1, 2015, the Government has opted to only grandfather the income on investments prior to August 30, 2010.

Grandfathering is a mechanism that exempts past transactions from the rigours of new regulations.

The sanctity of August 30 is that it was the date on which the Direct Taxes Code Bill was introduced in Parliament.

Considering that the code has not yet been promulgated, the legitimacy of the same can well be put to judicial scrutiny, said Aseem Chawla, Partner, MPC Legal, a law firm.

WHAT ABOUT SAAR?

A missing feature in the latest rules is the absence of clarity on situations where existing special anti-avoidance rules (SAAR) is triggered.

The Shome Committee had recommended that when GAAR and SAAR are both in force, only one of them will apply to a given case.

Guidelines will be made regarding the applicability of one or the other, the Shome panel had said.

Hopefully, CBDT will act on these lines.

Also, a key Shome panel recommendation — ensuring that the same income is not taxed twice in the hands of the same taxpayer in the same year or in different assessment years — should be implemented.

Although the taxman has got a special weapon in the armoury in the form of GAAR, only time will tell how effectively it will be used.a

Business Line, New Delhi, 30-09-2013