One of the major issues that needs to be clarified is how GAAR will interact with tax treaties such as those signed with Mauritius and Singapore
The finance ministry has announced its much-awaited approach in relation to the final GAAR report submitted by the expert review committee headed by Dr Parthasarathi Shome via a press release. The matter is far too complex to be de-coded through a simple statement or press release. The nature of the GAAR framework, the current chapter-XA of the Income-tax Act 1961, the final report from the review committee and the press release cannot be interpreted harmoniously. However, given that certain benevolent statements have been made in recent months on the twin issues of GAAR and indirect transfers, the press release has been widely read in a manner beneficial to the taxpayer.
Deferral of the applicability of GAAR provisions to April 1, 2016, is clearly the bigger piece of the entire story. However, by April 2016, the current GAAR framework will be 4-5 years old and will definitely need a review before it is actually implemented. It is a matter of relief that GAAR will be applied to arrangements where their main purpose and not ‘one of the main purposes’ is tax avoidance. GAAR implications will be restricted to only the impermissible part and not the whole of the transaction/arrangement. Show-cause notices from the tax officer will contain reasons for a possible GAAR examination. Further, taxpayers will get an opportunity to prove that the proposed arrangement/transaction is not impermissible.
On the lines of committee recommendations, the finance minister’s statement provides that GAAR will not apply to such FIIs that choose not to take any benefit under a tax treaty. By implication, this means that where an FII chooses to apply a tax treaty like, say, the Mauritius or Singapore tax treaty, GAAR could be applied to examine eligibility to benefits under such treaties.
The Shome committee has recommended that whether an FII chooses or does not choose to take a treaty benefit, GAAR provisions should not be invoked in the case of a non-resident who has invested, directly or indirectly, in the FII, including holders of P-notes issued by the FII.
In this regard, the FM’s statement indeed provides that GAAR will also not apply to non-resident investors in FIIs. Possibly, there is no intention to tax P-notes. The Shome committee recommended that gains in the nature of either capital gains or even business income arising from a transfer of equity shares or units of equity-oriented mutual funds, which are subject to securities transaction tax (STT), should be exempt for both residents and non-residents.
Alternatively, until the abolition of tax on listed securities, the government should respect tax residency certificates (TRC) issued by the Mauritius authorities and refrain from taxing gains generated by Mauritian tax residents if a valid TRC is furnished in terms of circular 789 of 2000. Effectively, the committee recommended that where circular 789 is applicable, GAAR provisions shall not apply to examine the genuineness of the residency of an entity set up in Mauritius. In other words, a valid TRC should be sufficient to obtain benefits under the applicable tax treaty and such benefits should not be subject to GAAR examination.
The committee suggested that where the tax treaty itself has anti-avoidance provisions or limitation of benefits (LOB) clauses, such as in the tax treaty with Singapore, GAAR provisions should not override the treaty. To complete the picture, the committee recommended that the amendment in the income tax law providing that GAAR overrides the tax treaties entered by India with various countries should be suitably amended. The press release simply tells us that, where both GAAR and specific anti-avoidance rule (SAAR) are in force (read where both are applicable), then only one of them will apply. It appears that there will be discretion with the tax officer as to which of the two is more beneficial to the revenue and to apply the same. There is a lack of clarity on whether a TRC issued by the Mauritian tax authority will be respected and obviate the need to invoke GAAR. Similarly more information is required on the status of SAAR and LOB clauses in the tax treaties. It appears that GAAR may continue to override tax treaties in cases involving unacceptable tax avoidance and all the recommendations of the committee have not been accepted in the matter.
Investments made before August 30, 2010, i.e. the date of introduction of Direct taxes Code Bill 2010 in Parliament, will not be subject to GAAR. What happens to transactions entered into between August 30, 2010, and April 2016 is not very clear. At the time of actual implementation of GAAR, the date of August 30, 2010, may need to be advanced closer to the date of actual implementation of GAAR as suggested by the review committee. Otherwise, some uncertainty will prevail in relation to the transactions on and from August 30, 2010, until the date of actual implementation. Helpful clarifications have been provided in relation to the approving panel, which will examine the applicability of GAAR on transactions. However, it is announced that directions issued by the approving panel will be binding on both the tax authorities as well as the taxpayer. This is a new development and will impact the forums available to the taxpayer to dispute applicability of GAAR on eligible transactions.
Hopefully, the Finance Bill 2013 expected next month will create a fine balance between the interests of revenue and the taxpayers and provide much-needed clarity on the issues discussed.
The author is partner, J Sagar Associates. Views are personal