In wide-ranging recommendations aimed at soothing the hackles of investors and revive the inflow of foreign capital, the expert committee on General Anti Avoidance Rules (GAAR), headed by Parthasarathi Shome, has advocated postponement of the controversial tax provision by three years till 2016-17 along with abolition of capital gains tax on transfer of securities.

In a further reassurance to foreign institutional investors (FIIs) operating through the Mauritius route, the expert panel, in its draft report submitted to the government on August 31 and put in the public domain by the Finance Ministry on Saturday for comments from stakeholders, has suggested that the GAAR provisions should not be invoked to examine the genuineness of the foreign investor entities’ residency in the island nation.

Threshold of tax benefit

Among its other major recommendations for amendment in the Act, for guidelines to be prescribed under Income-Tax Rules, 1962, and for clarifications and illustrations through circular, the Shome panel has suggested that GAAR should be made applicable only if the monetary threshold of tax benefit is Rs.3 crore and more.

Alongside, 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 which was set up by Prime Minister Manmohan Singh in July, mainly to bring about tax clarity and address the concerns of foreign investors. Instead of only FIIs, the panel has been told to look into issues pertaining to all non-resident tax payers.

On the need for postponing implementation of GAAR, the Shome panel in its draft report said: “The implementation of GAAR may be deferred by three years on administrative grounds. GAAR is an extremely advanced instrument of tax administration — one of deterrence, rather than for revenue generation — for which intensive training of tax officers, who would specialise in the finer aspects of international taxation, is needed… Hence GAAR should be deferred for three years. But the year, 2016-17, should be announced now. In effect, therefore, GAAR would apply from Assessment Year 2017-18. Pre-announcement is a common practice internationally, in today‘s global environment of freely flowing capital.”

Mauritius issue

Of particular concern for FIIs was the Mauritius issue. To address their concerns, the expert panel said that while the provisions of GAAR should not be invoked to “examine the genuineness of the residency of an entity set up 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. “...if the 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,” it said.

In this regard, the Shome panel said: “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.”

While recommending that GAAR should apply “only in cases of abusive, contrived and artificial arrangements”, the Shome panel suggested that the I-T Act may be amended to provide that only arrangements which have the main purpose (and not one of the main purposes) of obtaining tax benefit should be covered under GAAR.

Highlighting that the objective of GAAR should be deterrence rather than revenue, the panel has recommended that the Approving Panel (AP) for purposes of invoking GAAR provisions should consist of five members, including Chairman, who should be a retired judge of the High Court. Besides, two members should be from outside government and persons of eminence drawn from the fields of accountancy, economics or business, with knowledge of matters of income- tax, and two members should be chief commissioners of income-tax or one Chief Commissioner and one Commissioner.

It also suggested that GAAR can be invoked only with the approval of the Commissioner.

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