GAAR issue: FIIs likely to pay STCG tax, says BMR's Butani

Implementation of the controversial GAAR (General Anti-Avoidance Rules) has been deferred by two years to April 2016 by finance minister P Chidambaram. The new rules have also exempted non-resident investors in FIIs from its purview. Along with this, Chidambaram has advised changes in clauses of chapter 10A of the Finance Bill 2012.

Mukesh Butani, Chairman of BMR Advisors however, feels FIIs can be subjected to short-term capital gains tax. “All I can see is a categorical statement that GAAR will not apply to FII. But we still need to see if there is any rejigging of either the Securities Transaction Tax (STT) or capital gains levy tax, particularly short-term capital gains (STCG) levy tax being made applicable to FII and other forms of taxpayers, because bear in mind that the expert group made wide-ranging recommendations on all forms of listed capital markets transactions which is not just applicable to FII, but other forms of investors including individual investors,” he explained. Butani also feels that Chidambaram took a logical path to defer GAAR by two years as he had to keep in mind the recommendations of the Shome committee as well as pay heed to the demands of the revenue department. Here is the edited transcript of the interview on CNBC-TV18 Q: What is your reaction to the two year deferral from 2014 to April 1, 2016. There was a call for a three year deferral, but two year is not bad? A: I guess the Finance Minister has to listen to both the sides, his expert committee chaired by none other than Dr Shome, who happens to be his advisor in the government now and also views that came from the Department of Revenue which was not liking the recommendation of a three year deferral. I guess he has decided to walk the middle path and deferred it by two years. Even if he had deferred it by one year, it would have automatically meant a two year deferral because we are not going to see a full-fledged budget as per the scheduled date next year because it is the election year. If the budget is announced in June 2014, you cannot have a law that will be made applicable from April 1, 2014. Logically, it made sense for him to defer it by two years. Q: About the relief clauses that have been added, there is a monetary threshold of Rs 3 crore for General Anti Avoidance Rules (GAAR) implementation, also any non-resident investor and Foreign Institutional Investor (FII) will not be under GAAR. Are these announced to console industry at this point in time? A: No, I have not seen the amendments that have been moved, but I do not think the Rs 3 crore threshold limit is of any significance. I think what is of significance is GAAR not being made applicable to FIIs. I think you have to read this statement together with any supplementary amendments that are likely to be moved in the Finance Bill of 2013, because if you recall, Dr Shome’s group made wide-ranging recommendations, not just on GAAR but also on the rates of tax applicable for securities’ transactions in the stock market. There are two aspects to it. One, a statement that is being made is that GAAR will not apply to FII makes perfect economic sense to me because you cannot have FII taxation being subjected to any controversy and secondly, we will need to wait and see if there is any rejigging of tax rates that it carries out in the Finance Bill of 2013 with respect to capital markets transactions. All I can see is a categorical statement that GAAR will not apply to FII. But we still need to see if there is any rejigging of either the Securities Transaction Tax (STT) or capital gains levy tax, particularly short-term capital gains levy tax being made applicable to FII and other forms of taxpayers, because bear in mind that the expert group made wide-ranging recommendations on all forms of listed capital markets transactions which is not just applicable to FII, but other forms of investors including individual investors. _PAGEBREAK_ Q: If a tax structure is for avoidance, GAAR will apply regardless of tax treaties. What does this mean for Double Tax Agreements (DTAs), overall tax treaties that India has? What does this mean essentially? A: There are two aspects. One simply stated, it says that if a taxpayer indulges in treaty shopping then tax avoidance will apply, GAAR will be made applicable. You really need to look into the specific treaties, treaties that have specific anti-avoidance rules built in it. For example, in case of the Limitation of Benefits Clause, GAAR will apply. You also need to take into consideration that this statement which is being made is very much an established jurisprudence. This is something that even the Supreme Court highlighted in Vodafone’s case that if there is a structure that is motivated for tax avoidance purposes then those structures will be questioned. Now, the government will achieve a legislative tooth to be able to examine those structures and in the past these structures were being looked at from a judicial principle standpoint. What would be important is to see treaties that do not have in-built GAAR provisions like the limitation of benefits clause. What would happen in those situations? Dr Shome’s panel did make specific recommendations on continuity of Central Board of Direct Taxes’ (CBDT) circular with respect to the Mauritius Treaty. There has been no specific mention of that which has been made today. Will the government now invoke GAAR which is under the domestic law and question treaties including treaties which do not have an in-built anti-avoidance provision is something which is not open for debate and I am not in a position to comment on that. But, it would be interesting to see to what extent the expert panel’s recommendations have been accepted. What we have right now is really the headline news in term of the date of applicability of the legislation and the fact that it will not apply to FIIs. Also Read: Implementation of Shome Panel suggestions welcome: KPMG
Two year GAAR deferral good news, says ALMT Legal