Budget 2017: No more delays: GAAR to kick-in from April 1, 2017

Gaurav Choudhury

Moneycontrol

General Anti Avoidance Rules (GAAR) that will empower taxmen to clampdown on deals and income suspected to have been structured only to avoid paying taxes will come into force from April 1, 2017 with government not favouring any further delay.

“The government is unlikely to further defer GAAR, to enable the tax authorities to neutralise the tax advantage obtained through shell companies or firms in tax havens. The commitment for implementing GAAR from April 1, 2017 will not change,” a source told Moneycontrol.

In a notification in June, the Central Board of Direct Taxes (CBDT) had amended relevant rules clearly stating that “GAAR would not apply to income earned / received by any person from transfer of investments made before April 1, 2017”.

Accordingly, foreign institutional investors (FIIs) will be exempt from GAAR for funds deployed before April 1, 2017. This provision of “grandfathering” the investments made prior to April 1, 2017 is aimed at removing lurking fears over retrospective taxation.

Sources also said that GAAR would be invoked only when “the main purpose is to avoid tax”.

India’s courts have ruled that saving of taxes through permissible instruments of tax planning is legitimate. But tax avoidance is illegal.

“One hopes that GAAR will be called into operation only to address the more egregious forms of tax avoidance and genuine arrangements made for business considerations are not unnecessarily hit,” a Delhi-based top corporate lawyer, who advises foreign and local clients on investments worth millions of dollars.

Despite the grandfathering, there is also a fear of GAAR’s retrospective applicability, particularly on so-called “step transactions” that spread over a few years.

For instance, if the transaction that has commenced in steps in 2014 but will complete only in 2019 may attract GAAR removing the scope of “grandfathering”

“It would be preferable if the CBDT were to give specific guidance on when this provision will get triggered,” the lawyer said, requesting not to be identified.

GAAR’s implementation was proposed by the previous UPA government to check tax avoidance. It was proposed with a view to bar companies from aggressive tax planning by use of opaque low tax jurisdictions such as Mauritius.

It was initially included in the Income Tax Act in 2012 but implementation was postponed after opposition from foreign investors.

Finance Minister Arun Jaitley last year said that the government was committed to implement GAAR from April 1, 2017.

GAAR will also be compatible with the amended tax treaties with Mauritius, Singapore and Cyprus.

In May last year, the government amended the three-decade old double taxation avoidance agreement (DTAA) with Mauritius—India’s largest foreign direct investment (FDI) source.

Under the amended treaty, India will levy capital gains tax on investments routed through Mauritius from April 1 this year, effectively clamping down on tax dodgers who used to route investments through `shell’ or paper companies registered in the South east Asian nation.

Changes were approved changes in similar treaties with Cyprus and Singapore to plug tax leakages.

The taxes on capital gains will apply to investments made from April 1, 2017 and will be imposed at 50 percent or half of the domestic rate until March 31, 2019, and at the full rate thereafter.

Investments made through companies registered in Mauritius, Singapore and Cyprus before April 1, 2017 have been grandfathered and will not be subject to capital gains taxation in India.