Finance minister Arun Jaitley is likely to defer implementation of the dreaded General Anti-avoidance Rules (GAAR) by at least a year so that tax officers and the industry are better equipped for the sophisticated tool aimed at preventing tax avoidance. As per the original plan, GAAR, formulated by the UPA government, was to come into effect from financial year 2013-14 (assessment year 2014-15), but was deferred by two years, acceding to industry demands.
The government doesn’t want the rules to be implemented aggressively as transfer pricing rules were applied in many cases. Extending GAAR’s implementation to FY17 (assessment year 2017-18), sources said, would help both the tax department and businesses to prepare for it.
They added that the deferment will aid the current course correction in tax policy towards a more stable one. “A lack of comprehension of law together with work overload had made some of the officers slap transfer pricing adjustments (addition to the taxable income) on taxpayers at the fag end of recent financial years. That is being addressed now,” said a finance ministry official who asked not to be named.
Sources said the I-T department was taking special care to ensure that principles of natural justice were followed in all transfer pricing adjustments that would be made in the current audit year and that field officers are asked to give extensive hearings to firms before a notice is issued for income suppression on cross-border transactions.
“GAAR is an extraordinary provision in tax law. More work needs to be done before its enforcement and it may be a good idea to defer it by a year or two so that a proper mechanism could be put in place for its smooth implementation,” said SP Singh, senior director at Deloitte.
GAAR was introduced in 2012 by the then finance minister Pranab Mukherjee with effect from financial year starting April 1, 2013 (assessment year 2014-15), but his successor P Chidambaram modified certain provisions and deferred its implementation by two years till financial year beginning April 1, 2015.
These rules, which are in force in many countries, allow officials to investigate whether a business arrangement has commercial substance or is merely a ploy for obtaining tax benefits. If found to be an impermissible arrangement that is legal only in form and is mainly aimed at saving tax, such benefits would be denied.
GAAR would also override provisions in tax treaties. Once it is in force, the tax department could ask Mauritius-based entities investing in listed securities in India whether they are shell companies meant to avoid the 15% short-term capital gains tax in India or are genuine businesses that want to participate in the Indian economy.
These rules seek to deny tax savings that companies try to make through business structures that are legal in form, but are without commercial rationale. By refusing to accept such ‘only-in-paper-arrangements’, the government wants to ensure tax benefits accrue only to the intended genuine economic activities. These arrangements are distinct from overt tax evasion, which involve suppression of facts and use of illegal means.
Chidambaram had accepted many of the industry demands for a more acceptable set of rules when he amended GAAR in 2013 and, subsequently, when he issued the rules in September that year. Among them is a Rs 3-crore safe harbour threshold. If the tax benefit sought to be achieved by all the parties in an arrangement is less than this amount, officials would not invoke GAAR for an investigation. Also, non-resident investors in offshore derivative instruments and FIIs would not be covered by GAAR. These rules do not apply to any income from transfer of investment made before August 30, 2010, the day the government announced its intention to bring in GAAR in the Direct Tax Code.
