Recommendations on GAAR kindle investor's hopes: Emkay

Emkay Global Financial Services has come out with its report on "India Taxation". According to the research firm, Parthasarathi Shome committee on General Anti Avoidance Rules (GAAR) submitted its report to the finance ministry and has recommended deferring the controversial tax provision by three years and abolition of capital gains tax on transfer of securities.

Recommendations on GAAR, presented by the Shome committee, hint at a cheer for investor and market sentiment, specifically the FIIs. If accepted, the GAAR tax provision would be deferred by three years and capital gains tax would be abolished on transfer of securities. The same would imply probable adjustments with reference to other taxes, questionable given the current market scenario. The recommendations seem likely to be accepted by the ministry giving officers and investors the time to understand the evolving taxation regime.

Recommendations to defer GAAR: Parthasarathi Shome committee on General Anti Avoidance Rules (GAAR) submitted its report to the finance ministry and has recommended deferring the controversial tax provision by three years and abolition of capital gains tax on transfer of securities. Overall, the committee has tried to address the concerns of all stake holders, specially the FIIs, by providing details that would remove uncertainty regarding the interpretation and administration of GAAR. Among various other things the committee has recommended a) Rs 30 mn threshold for GAAR application, b) clarity on definition of "commercial substance" c) definition of "connected person" be restricted to "associated person" d) constitution of Approving Panel, e) negative list for invoking GAAR and f) excluding anti-avoidance tax treaties as in the case of Singapore under application of GAAR.

The committee recommends abolition of 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 increasing the rate of Securities Transaction Tax (STT) appropriately. While the actual form of hike in STT will be decided by the government, a general hike could impact
financial intermediation industry.

While comments from all stakeholders have been sought by September 15 for drawing up the final guidelines on GAAR, the Finance Ministry has also expanded the terms of reference of the expert panel to look into issues pertaining to all non-resident tax payers.

Important things emphasized by the committee are:

• GAAR is not a revenue-generating instrument, rather it is a deterrent
• Deferment of implementation of GAAR for three years is required for 1) enabling tax officers to build up skill set on international taxation and 2) Allow taxpayers with the habit of concocting tax avoidance schemes to adjust to the newly emerging environment of anti-tax avoidance.
• The three-year postponement should be announced now for the benefit of all.
• Rs 30 mn threshold for GAAR application: if the tax benefit is over Rs 30mn, only then should GAAR be applicable i.e. it would apply on companies with Rs 100mn as profit before tax. And 30% tax on that will bring the tax liability to Rs 3mn. Companies with Rs 100mn PAT will also have the capacity to handle issues like GAAR.
• Abolish capital gains tax on transfer of listed securities, appropriately increase security transaction tax rate
• Do not apply GAAR to check residential status of investor in Mauritius. The government should retain the provisions of the CBDT circular issued in the Year 2000 on acceptance of Tax Residence Certificate (TRC) issued by Mauritius.
• Use GAAR only in cases of abusive, contrived and artificial arrangements
• Amend income tax act and rules appropriately; issue circular to clarify provisions with illustrations
• Stakeholders asked to submit comments by Sep 15, 2012
• Hope to complete the report on P-Notes and non-resident investors of FIIs in a month

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