Hon’ble Prime Minister had constituted an Expert Committee on General Anti Avoidance Rules (GAAR) to undertake stakeholders’ consultations for finalization of guidelines to ensure greater clarity on GAAR issues.
The Expert Committee after analysing the existing GAAR guidelines as well as after considering the inputs received from various stakeholders have made various recommendations for smooth implementation of GAAR provisions.
The gist of the recommendations is as under:
1. The implementation of GAAR may be deferred for a period of three years on administrative grounds. i.e. GAAR provisions would apply from AY 2016 – 2017. However this should be announced now itself. This period of three years is needed to provide intensive training to tax officers as well as to put in place appropriate procedures/processes including establishment of Approving Panel. Also this would be in line with the global practice of preannouncement of any major tax change, in today’s global environment of freely flowing capital.
2. Monetary threshold of Rs. 3 crore of tax benefit (including tax only and not interest) to a taxpayer in a year should be considered for applicability of GAAR provisions. In case of tax deferral, the tax benefit shall be determined based on the present value of money.
3. All the investments (though not arrangements) made by a resident/non resident existing as on the date of commencement of GAAR provisions should be grandfathered so that on exit (or sale) of such investments on or after this date, GAAR provisions are not invoked for the examination/denial of tax benefit.
4. Onus on the revenue to prove that tax benefit is the main purpose of the arrangement.
5. Amendment in the Income Tax Act to provide that only arrangements having main object (and not one of the main purposes) of obtaining tax benefit should be covered under GAAR.
6. Where only a part of the arrangement is impermissible, the tax consequences under GAAR of an “impermissible avoidance arrangement” will be limited to that portion of the arrangement.
7. Presently Section 97(4) states that the following factors are not considered relevant for determining whether an arrangement lacks commercial substance or not:
i. The period or time for which the arrangement exists;
ii. The fact of payment of taxes, directly or indirectly, under the arrangement,
iii. The fact that an exit route (including transfer of any activity/business or operations) is provided by the arrangement
The Committee has recommended that the above factors are not sufficient for an arrangement to be excluded from the commercial substance test but may be relevant in the consideration of other aspects of GAAR. These factors will be taken into account in forming a holistic assessment to determine whether an arrangement lacks commercial substance.
8. Any resident/non resident may approach Authority for Advance Ruling (AAR) for determination of whether an arrangement undertaking by him is a impermissible avoidance arrangement or not and it recommends strengthening of administration of AAR, so as to ensure that ruling may be obtained within time frame of six months.
9. Tax Mitigation should be distinguished from tax avoidance before invoking GAAR.
10 .Illustrative negative list for invoking GAAR should include:
i. Selection of one of the options offered in law For e.g.:
a. Payment of dividend or buy back of shares by a company
b. Setting up of a branch or subsidiary
c. Setting up of a unit in SEZ or any other place
d. Funding through debt or equity
e. Purchase or lease of a capital asset
ii. Timing of a transaction, for instance, sale of of property in loss while having profit in other transactions
iii. Amalgamations and demergers (as defined in the Income Tax Act) as approved by the High Court.
iv. Intra group transactions which may result in tax benefit to one but overall tax refund is not effected either by actual loss of revenue/deferral of revenue.
11. The principle should be that GAAR is to be applicable only in cases of abusive, contrived and artificial arrangements.
12. Government should abolish tax on gains arising from transfer of listed entities (whether in the nature of capital gains/business income) to both residents as well as non residents. In order to make this proposal revenue neutral for the Government, Securities Transaction Tax (STT) may be increased appropriately. This would also make tax aspect pertaining to income from shares of listed entities internationally comparable.
In case the above is not acceptable to the Government, then until the abolition of tax on capital gains, another best alternative would be to retain the circular No.789 accepting the Tax Residency Certificate adopted by Mauritian Tax authorities.
13. GAAR provisions shall not apply to examine the genuineness of a residency set up in Mauritius where Circular No. 789 of 2000 with respect to Mauritius (Providing that a Certificate of Residence (TRC) issued by the Govt. of Mauritius would constitute sufficient evidence for accepting the status of residence of a person as well as beneficial ownership for applying the tax treaty) is applicable.
14. In cases where specific anti avoidance rule (SAAR) as available under the present Income Tax Act is applicable to a particular aspect/element, GAAR shall not be invoked to look into that particular aspect/element.
15. Where the treaty itself has anti-avoidance provisions (in the form of limitation of benefit, etc), then such provisions should not be substituted by GAAR provisions under the treaty override provisions.
16. In cases of evidence of violations of anti avoidance provisions in the treaty, the treaty should be revisited, but GAAR should not override the treaty.
17. While determining tax consequences of an impermissible avoidance arrangement, corresponding adjustment should be allowed in the case of the same taxpayer in the same year as well as in different years. However, no relief by way of such corresponding adjustment should be allowed in the case of any other taxpayer.
18. Amendment in tax audit report to include reporting of tax avoidance schemes above a specific threshold of tax benefit of Rs. 3 crores or above.
19. While processing an application u/s. 195(2) or 197 of the Act pertaining to withholding of taxes, the assessing officer:
i. Shall not invoke GAAR where the tax payer submits a undertaking to pay tax along with interest if it is found that GAAR provisions are applicable in relation to the remittance during the course of assessment proceedings.
ii. May invoke GAAR provisions with the prior approval of Commissioner in the order u/s. 195(2) or 197, in case the taxpayer does not submit satisfactory undertaking as mentioned above.
Foreign Institutional Investor Related issues:
20. Where a Foreign Institutional Investor (FII) chooses not to take any benefit under an agreement entered into by India under section 90 or 90A of the Act and subjects itself to tax in accordance with domestic law provisions, then, the provisions of GAAR shall not apply to such FII;
21. Whether an FII chooses or does not chose to take a treaty benefit, GAAR provisions would not be invoked in the case of a non-resident who has invested, directly or indirectly, in the FII i.e. where the investment of the non-resident has underlying assets as investments made by the FII in India. However, this exemption to a non-resident shall be available only in respect of listed securities made by the FII in India.
Procedural Recommendations – GAAR:
22. The Commissioner (CIT) should make a reference to the Approving Panel within 60 days of the receipt of the objection from the assessee with a copy of the assesee;
23. In case of CIT accepting assessee’s objection and being satisfied that GAAR provisions are not applicable, the CIT shall communicate his decision to AO within 60 days from the date of receipt of assessee’s objection with a copy to the assesee.
24. No action shall be taken by the CIT after a period of six months from the end of the month in which reference for GAAR was received by CIT and consequently GAAR cannot be invoked against the assesee.
25. The Approving Panel should consist of five members including Chairman;
26. The Chairman should be a retired judge of the High Court;
27. Two members should be from outside Govt. and persons of eminence drawn from the fields of accountancy, economics or business, with knowledge of matters of income-tax; and
28. Two members should be Chief Commissioners of income tax; or one Chief Commissioner and one Commissioner.
29. The decision of Approving Panel should be by a majority of members.