GAAR panel to now cover non-resident tax payers

The government on Saturday expanded the scope of the expert committee on General Anti-Avoidance Rules (GAAR) to include all non-resident tax payers, even as the Committee submitted its draft report to the Ministry.

The announcement to increase the scope of GAAR committee, which is headed by tax expert Parthasarthi Shome, was made after the panel in its report suggested changes in the Income Tax Act and Rules.

The committee, which was set up by Prime Minister Manmohan Singh in July to address concerns of foreign and domestic investors on GAAR, suggested the government should issue a circular to clarify GAAR provisions along with illustrations.

“The draft report has recommended certain amendments in the Income-tax Act, 1961; guidelines to be prescribed under the Income-tax Rules, 1962; circular to clarify GAAR provisions along with illustrations; and other measures to improve tax administration specifically oriented towards GAAR matters”, a Finance Ministry release said.

“It has now been decided to expand the scope of the terms of reference of the committee to include all non-resident tax payers instead of only FIIs,” it said.

The Finance Ministry had earlier on August 6, 2012 asked the expert committee to examine the applicability of the amendment on taxation of non-resident transfer of assets where the underlying asset is in India, in the context of Foreign Institutional Investors (FIIs) operating in India purely for portfolio investment.

The stakeholders, the release added, can submit their comments on the draft report by September 15.

In view of the concerns expressed by investors, the Government had already postponed implementation of GAAR by a year to April, 2013. The proposal was introduced in Budget for 2012-13 by the then Finance Minister Pranab Mukherjee.

The report of the Shome Committee, which seeks substantial modification of the original proposals, was made public within days of Parliamentary Standing Committee of Finance expressing concerns over deterioration of investment climate.

In its report on Current Economic Situation and Policy Options, the Standing Committee had said that investment climate in the country has suffered serious setback and investors confidence was hit mainly because of the concerns over the impact of retrospective tax laws and GAAR.

Earlier, Central Board of Direct Taxes (CBDT) had come out with draft guidelines on GAAR which did not find favour with Prime Minister Manmohan Singh, who was looking after the Finance portfolio. He had announced setting up of Shome panel to come up with fresh report after talking to stake holders.

In order to address the concerns of Mauritius-based investors, the Shome panel has suggested that the provisions of the GAAR should not be invoked to "examine the genuineness of the residency of an entity set up in Mauritius".

The draft further said that the government should retain the provisions of the CBDT circular, which was issued in 2000, on acceptance of Tax Residence Certificate (TRC) issued by the Mauritius.

"...if Government cannot accept it (proposal to abolish capital gains tax on transfer of listed securities) on political economy grounds, a second best alternative would be to retain...the Circular accepting Tax Residence Certificate issued by the Mauritius authorities", the report said.

India has been expressing concern over misuse of Double Taxation Avoidance Agreement (DTAA) by foreign investors who route their investments from Mauritius to avoid tax liability.

The Committee wants, "the Government should abolish the tax on gains arising from transfer of listed securities, whether in the nature of capital gains or business income, to both residents as well as non-residents. In order to make the proposal tax neutral, the Government may consider to increase the rate of Securities Transaction Tax (STT) appropriately".