Govt may drop GAAR, PM to issue clarification soon: Sources

Finance Ministry, now under the Prime Minister, is likely to issue a clarification circular on the retrospective amendment of section 9, reports CNBC-TV18's Aakansha Sethi quoting sources. It is learnt general anti-avoidance rules (GAAR), for now, is likely headed for a cold storage and the government may push it beyond 2014 election or drop it completely.

The government is likely to take remove the unintended consequences of section 9. Since Section 9 brought in the word 'indirect transfer' of assets it says that indirect transfer will be taxed in cases where substantial value is derived from underlying assets in India.

So the Finance Ministry is likely to define substantial as majority interest so that inter-group transfers of international companies where the underlying assets in India may not be taxed. Also, indirect transfer of shares that are listed on a recognize stock exchange maybe kept out of the tax net.

Also, P-notes are likely to be excluded from taxation. Earlier, former Finance Minister Pranab Mukherjee had said that P-Notes were not going to be taxed, but there is no formal circular on this. This is likely to be included in this clarification to the retrospective amendment.

GAAR clarification

The Finance Ministry is also likely to come out with a clarification on GAAR. The Prime Minister is likely to clarify and give instances of cases where GAAR will be invoked.

In fact in meetings in the past where market participants have met the Finance Ministry they have asked specific questions. They have given examples of cases where they fear GAAR will be invoked. All of these will be clarified as will there be GAAR invocation or not, because there is no arbitrary or random invocation of GAAR by the tax authority and it is not discretionary, but it is given in on objective manner. So, commercial substance will also be defined properly.

Sources in the Finance Ministry also suggest that there is still time to go before the implementation of GAAR which is the April 1, 2013 and there is no hard and fast rule the Finance Ministry could re-examine a further postponement of GAAR. There is no final word on this yet. This is just involving thought in the Finance Ministry that if required, if the global economic context will require that could also be considered at a later point in time.

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