Centre says GAAR effective April 1, industry demurs

The new rules give tax authorities the right to scrutinise and tax transactions which they believe are structured solely to avoid taxes.

January 27, 2017 08:13 pm | Updated 10:45 pm IST - New Delhi

Finance Minister Arun Jaitley had in his Budget speech in 2015, deferred GAAR implementation by two years and also said that the investments made up to March 31, 2017 shall not be subjected to GAAR. Photo: PTI

Finance Minister Arun Jaitley had in his Budget speech in 2015, deferred GAAR implementation by two years and also said that the investments made up to March 31, 2017 shall not be subjected to GAAR. Photo: PTI

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.

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