Investors can cheer. In a bold move, a government tax panel has recommended abolition of capital gains tax on sale of listed securities by both resident and non-resident investors. The Parthasarathi Shome panel on General Anti-Avoidance Rules (GAAR) also proposed deferment of these controversial rules to 2016-17 (assessment year 2017-18), besides a substantial dilution in the rules.
Currently, there is no long-term capital gains on listed securities in India while short-term gains are taxed at 10-30% depending on the class of investors.
?Abolish the tax on gains arising from transfer of listed securities whether in the nature of capital gains or business income to both residents as well as non-residents,? the panel said. Some experts said that if short-term capital gains tax is abolished, the government may raise the securities transaction tax (STT) correspondingly to compensate for the revenue loss.
GAAR, which has examples of many other jurisdictions, was proposed in Finance Act 2012 and is meant to thwart tax avoidance by firms by creating structures lacking business rationale. This has, however, raised fears among the investor community, prompting Prime Minister Manmohan Singh to set up the Shome panel to address these concerns.
The first draft report of the committee also proposed a major dilution in the original intention of taxing investments from Mauritius-based entities and said that if a limitation of benefit clause is part of the tax treaty with that country, then GAAR will not apply overriding the treaty.
The panel also suggested a R3-crore threshold for invoking GAAR on an arrangement. If the tax benefit from an arrangement is less than this threshold, anti-avoidance rules will not be invoked.
The panel sought to distinguish between tax reduction and tax avoidance while proposing the relaxed norms. Justifying the deferment of the rules, the panel said tax officials need to be trained in the complexities of international taxation.
Experts welcomed the move, saying the draft rules had addressed most of the investor concerns reasonably. ?This clearly shows a responsiveness to investor concerns and is in line with the commitment by the government to improve the business and investor sentiment,? said Rahul Garg, leader, direct taxes, PwC India.
The panel also recommended a negative list to which GAAR provisions should not apply. The list includes payment of dividend or share buyback by companies, setting up branch or subsidiary or setting up units in SEZs or other places, funding through debt or equity and purchase or lease of capital assets. The panel also said that if intra-group transactions are overall tax neutral, GAAR should not be invoked. High court approved mergers and amalgamations are also kept out of the anti-avoidance rules.
Mauritius-based entities got a major relief as the panel proposed that if residency certificate is provided, GAAR will not be invoked on such investors. ?GAAR is to be applicable only in cases of abusive, contrived and artificial arrangements,? the panel said.
Neeru Ahuja, partner, Deloitte Haskins & Sells, said the committee has recognised that the Indian economy has not yet reached the level of sophistication of developed countries that have implemented GAAR. ?Further, the current business environment in India is not perceived as favorable, particularly to foreign investors, and implementing GAAR at this time could further damage the level of uncertainty in the business environment.?
Meanwhile, the government, which had asked the expert committee to examine the applicability of the retrospective tax changes regarding taxation of non-resident transfer of assets where the underlying asset is in India, in the context of Foreign Institutional Investors (FIIs) operating in India purely for portfolio investment, has now decided to expand the scope of the terms of reference of the committee to include all non-resident tax payers.
