The Centre has reiterated that the General Anti Avoidance Rules – aimed at curbing tax avoidance – will come into force on April 1, ignoring industry’s suggestion to defer the rules on account of uncertainty over their applicability and to provide adequate time to prepare for the new regime.
The government’s resolve to stick to the rollout date for the GAAR regime announced in the 2016 Budget was reflected in clarifications issued by the Finance Ministry on Friday.
The Finance Ministry, as part of the clarifications, made clear its rules regarding several issues that the industry had demanded greater clarity on, including the specific cases in which GAAR would apply to Foreign Portfolio Investments (FPI), the treatment of Limitation of Benefits (LOB) clauses and the precedence given to court rulings in such situations.
CBDT’s clarifications indicate that the implementation of GAAR “is unlikely to be deferred,” said Girish Vanvari, Partner and National Head of Tax at KPMG India. “Clarification is provided for investments made prior to April 1, 2017 and also to bonus on these shares, splits and consolidation thereon and shares acquired on the conversion of compulsory convertible instruments.”
“(These are) very credible and serious clarifications by the Government covering some of the most practical situations often faced by businesses/investors,” said Sanjay Sanghvi, Tax Partner at Khaitan & Co. “It will help in a fair administration of GAAR provisions while providing clarity to tax advisors and taxpayers and avoiding uncertainty and anxiety.”
LOB clause clarity
“One good thing is that they have clarified that if the limitation of benefits (LOB) clause sufficiently addresses tax avoidance, then GAAR will not apply,” Amit Maheshwari, Managing Partner, Ashok Maheshwary & Associates told The Hindu . “Most new treaties being signed are with the LOB clause. Therefore, foreign investors have clarity now. Another positive thing is that court-approved arrangements are outside the purview of GAAR.”
The clarifications partially fulfill a long-standing demand of the industry, said Rajesh H. Gandhi, Partner at Deloitte Haskins & Sells. However, “the benefit has now got diluted to a large extent because the LOB clause in the India-Singapore and Mauritius treaties is relevant only for availing the 50% tax rate for two years,” he said.
The official clarification also said that, if at the time of sanctioning an arrangement, the court had explicitly and adequately considered the tax implications, then GAAR would not apply to such an arrangement.
It has also been clarified that GAAR would not apply if an arrangement was permitted by the Authority for Advance Rulings.
“(This) is also welcome because it provides more certainty to the fact that if one arm of the Government approves a transaction, it will not be struck down under GAAR,” Mr. Gandhi said. “This clarification has however been caveated (sic) by the requirement that the Court should have explicitly and adequately considered the tax implications.”
While these clarifications are expected to bring about some certainty to GAAR issues, experts said believe that some doubts would still remain primarily because of the subjectivity inherent in GAAR and also because some of the answers are open-ended.
“Strangely, acquisition of shares in mergers and demergers are not grandfathered though through the original shares are acquired prior to April, 1, 2017,” Mr. Vanvari added. “The definition of investments is expanded to mean more than shares, i.e. investments as appearing in the books of accounts earning rent, interest and dividends.”
“The Government has clarified that GAAR will not be invoked if an FPI invests from a jurisdiction for commercial reasons and the main purpose of investing from such jurisdiction is not to avail tax benefits,” Mr. Gandhi added. “This will give some guidance to FPIs who would now have to ensure that they choose a jurisdiction which gives them various non-tax benefits and availability of treaty benefits is not the only purpose, though it could be one of the purposes.”
Despite the fact that the clarifications by the government are a step in the right direction, experts said believe that the industry would best be served if the rollout of GAAR was deferred.
“To sum up, the guidelines are a step in the right direction towards execution of GAAR, but has many areas where the guidance could be firmer and more conclusive (like SAAR and GAAR, SPVs in tax-free jurisdiction),” Mr. Vanvari said. “Needless to add, the best case would be to defer GAAR till the industry is ready for execution.”
