The
Central Government has carefully considered the report of the Expert Committee
on General Anti Avoidance Rules (GAAR) and accepted the major recommendations
of the Expert Committee with some modifications. This was announced by the
Union Finance Minstar Shri P.Chidambaram here today in a press conference. The Finance Minister said
that the following decisions have been taken by
Government in this regard:
(i) An
arrangement, the main purpose of which is to obtain a tax benefit,
would be considered as an impermissible avoidance arrangement. The
current provision prescribing that it should be “the main purpose or one of the
main purposes” will be amended accordingly.
(ii) The
assessing officer will be required to issue a show cause notice,containing
reasons, to the assessee before invoking the
provisions of Chapter X-A.
(iii) The
assessee shall have an opportunity to prove that
the arrangement is not an impermissible avoidance arrangement.
(iv) The two separate definitions in the current
provisions, namely, ‘associated person’ and ‘connected person’ will be combined
and there will be only one inclusive provision defining a ‘connected
person’.
(v) The Approving
Panel shall consist of a Chairperson who is or has been a Judge of a
High Court; one Member of the Indian Revenue Service not below the rank of
Chief Commissioner of Income-tax; and one Member who shall be an academic or
scholar having special knowledge of matters such as direct taxes, business
accounts and international trade practices. The
current provision that the Approving Panel shall consist of not less than three
members being Income-tax authorities or officers of the Indian Legal Service
will be substituted.
(vi) The Approving Panel may have regard
to the period or time for which the arrangement had existed; the fact
of payment of taxes by the assessee; and the fact
that an exit route was provided by the arrangement. Such factors may be
relevant but not sufficient to determine whether the arrangement is an
impermissible avoidance arrangement.
(vii) The directions issued
by the Approving Panel shall be binding on the assessee
as well as the Income-tax authorities. The current provision
that it shall be binding only on the Income-tax authorities will be modified
accordingly.
(viii) While
determining whether an arrangement is an impermissible avoidance arrangement,
it will be ensured that the same income is not taxed twice in
the hands of the same tax payer in the same year or in different assessment
years.
(ix) Investments
made before August 30, 2010, the date of introduction of the Direct Taxes
Code, Bill, 2010, will be grandfathered.
(x) GAAR will
not apply to such FIIs that choose not to take any
benefit under an agreement under section 90 or section 90A of the
Income-tax Act, 1961. GAAR will also not apply to non-resident
investors in FIIs.
(xi) A monetary
threshold of Rs. 3 crore of
tax benefit in the arrangement will be provided in order to attract
the provisions of GAAR.
(xii) Where
a part of the arrangement is an impermissible avoidance arrangement, GAAR will
be restricted to the tax consequence of that part which is impermissible
and not to the whole arrangement.
(xiii) Where
GAAR and SAAR are both in force, only one of them will apply to
a given case, and guidelines will be made regarding the applicability of one or
the other.
(xiv) Statutory forms
will be prescribed for the different authorities to exercise their
powers under section 144BA.
(xv) Time
limits will be provided for action by the various authorities under
GAAR.
(xvi) Section
245N(a)(iv) that provides for an advance
ruling by the Authority for Advance Rulings (AAR) whether an
arrangement is an impermissible avoidance arrangement will be retained and the
administration of the AAR will be strengthened.
(xvii) The
tax auditor will be required to report any tax avoidance arrangement.
Further, having
considered all the circumstances and relevant factors, the Government has also
decided that the provisions of Chapter X-A will come into force with
effect from April 1, 2016 (as against the current provision of April
1, 2014).
A number of countries have provided for
General Anti Avoidance Rules (GAAR) in matters relating to taxation. While tax mitigationis recognized, tax avoidance is frowned upon.
International literature describes tax avoidance as the legal
exploitation of tax laws to one’s own advantage and an arrangement entered into
solely or primarily for the purpose of obtaining a tax advantage.
The principle of GAAR was incorporated in the Direct Taxes Code which
was introduced as a Bill in Parliament on August 30, 2010.
Pending consideration of the Bill,
the Income-tax Act, 1961 was amended by Finance Bill, 2012 to add Chapter X-A
titled ‘General Anti- Avoidance Rule’. It became part of the law when the
Finance Bill was passed by Parliament. Draft GAAR guidelines were
also published. Under the current provisions, Chapter X-A would come
into force with effect from April 1, 2014.
A number of representations were
received against the provisions contained in Chapter X-A. Hence, on
July 13, 2012, the Prime Minister approved the constitution of an Expert
Committee on GAAR to undertake stakeholder consultations and finalize the
guidelines for GAAR. Accordingly, an Expert Committee consisting of Dr.
Parthasarathi Shome and
three others was constituted on July 17, 2012 with broad terms of reference
including consultation with stakeholders and finalizing the GAAR guidelines and
a roadmap for implementation.
The
Expert Committee submitted its draft report on August 31, 2012 which was placed
in the public domain on September 1, 2012. After examining the
responses to the draft, the Expert Committee submitted its final report on
September 30, 2012.
The
final report of the Expert Committee has been now put on the website of the
Ministry of Finance i.e. finmin.nic.in.
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DSM/SS/GN