India: Expert Committee issues final report on GAAR – detailsFebruary 1, 2013
As previously reported, the Expert Committee (the committee) on General Anti-Avoidance Rules (GAAR) constituted by the Government of India (GoI) issued its draft report for public comments on 1 September 2012.
Accordingly, the committee, after considering the recommendations by various stakeholders, submitted its final report to the GoI on 30 September 2012.
The GoI has carefully considered the report. The major recommendations of the committee have been accepted with some modifications. The following main decisions have been taken by the Government:
- The provisions on GAAR will come into force with effect from the financial year of 1 April 2016.
- An arrangement, the main purpose of which is to obtain a tax benefit (and not “one of the main purpose” as previously stated), would be considered as an impermissible avoidance arrangement.
- GAAR will apply when the tax benefit exceeds the monetary threshold of US$0.5 million (INR30 million) in a year.
- Where a part of the arrangement is an impermissible avoidance arrangement, it will be ensured that GAAR will be restricted to that part which is impermissible (and not to the whole arrangement).
- GAAR will not apply to foreign institutional investors (FIIs) that choose not to take any tax treaty benefit. GAAR will also not apply to non-resident investors in FIIs.
- While determining whether an arrangement is an impermissible avoidance arrangement, it will be ensured that the same income is not taxed twice in the hands of the same taxpayer in the same year, or in different assessment years.
- Where GAAR and Specific Anti-Tax Avoidance Rules (SAAR) are both in force, only one of them will apply to a given case, and guidelines will be made regarding the applicability of one or the other.
- The tax auditor will be required to report any tax avoidance arrangement.
- The tax authorities will be required to issue a show cause notice, containing reasons, to the assessee before invoking the provisions of GAAR.
- Time limits will be provided for action by the various authorities under GAAR.
- The approving panel (AP) shall consist of a chairperson, who is, or has been, a judge of a high court; one member of the Indian Revenue Service not below the rank of chief commissioner of income tax; and one member who shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices. The current provision that the AP shall consist of not less than three members being income tax authorities or officers of the Indian Legal Service will be substituted.
- The AP may have regard to the (a) period or time for which the arrangement had existed; (b) the fact of payment of taxes by the assessee; and (c) the fact that an exit route was provided by the arrangement. Such factors may be relevant, but not sufficient to determine whether the arrangement is an impermissible avoidance arrangement.
- The directions issued by the AP shall be binding on the taxpayer as well as the tax authorities. The current provision that it shall be binding only on the tax authorities will be modified accordingly.
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