To check the misuse of tax treaties by Foreign Institutional Investors for the purpose of tax evasion, Government of India is planning to introduce GAAR; General Anti- Avoidance Rules.
Meaning & Need:
The arrangements of Foreign Institutional Investors which are entered into with the intention of tax avoidance are called Impermissible Arrangements. Please look at more features below:
a. These arrangements are entered into with the sole objective of obtaining tax avoidance.
b. They result in direct or indirect misuse or abuse of the provisions.
c. These arrangements are entered through by one or more persons and disguise the nature, location, source, ownership or control of funds.
FIIs are usually making investments through countries like Mauritius and other tax heavens for the sole purpose of tax evasion. As per the Finance Ministry, at present there are thirteen Mauritius based FIIs operating through impermissible pacts.
GAAR aims to target tax evaders partly by stopping Indian companies and investors from routing investments through Mauritius and other tax heavens for the sole objective of tax evasion.
Criticism against GAAR:
a. It is feared that once GAAR is introduced, FIIs who invest through countries like Mauritius to exploit bilateral tax treaties will have to pay capital gains tax for their investments in Indian equities.
b. The onus of proof for proving no tax avoidance will be on the tax payer and not the tax department.
c. GAAR provides wide discretion to the tax authorities which at times can be misused.
Proposed changes and Clarifications on GAAR:
a. Finance Minister has deferred the rollout of GAAR to beginning of next financial year i.e. April 2013, to provide more time to tax payers and tax offices.
b. The finance minister has proposed to remove the onus of proof completely from the tax payer and shift it entirely to revenue department
c. An independent member will be appointed in the GAAR approving panel and any local or foreign institutional investor can approach the authorities in advance for a ruling on potential tax liabilities.
d. The proposed changes will not override the provisions of Double Tax Avoidance treaties that India has with 82 countries. These changes will impact only those cases where the deal has been entered through low tax and no tax countries with whom India does not have tax treaties.
e. The finance minister has also proposed to reduce long term capital gain tax on private equity firms on the sale of unlisted securities to 10% from current rate of 20%.