NEW DELHI: In a bid to bring clarity in tax rules for foreign entities in India and their transactions, the Central government on Friday said the General Anti-Avoidance Rule (GAAR) aimed at plugging taxation loopholes, yet recognising genuine players, will be applicable from 2017-18.
"Stakeholders and industry associations had requested for clarification on implementation of GAAR provisions and a working group was constituted by the Central Board of Direct Taxes (CBDT) to examine the issues raised," an official statement said.
"Accordingly, CBDT has issued the clarifications on implementation of GAAR provisions today," it added.
Among the provisions, if the jurisdiction of a foreign portfolio investor is finalised based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, these rules will not apply.
They will also not interplay with the right of the taxpayer to select the method of implementing a transaction. Further, grandfathering (or the application of old rules on certain transactions) will be available in investments made prior to April 1 this year.
These include compulsorily convertible instruments, bonus issuess or stock splits, consolidation of holdings in respect of investments made prior in the hands of the of the same investor.
"It has also been clarified that the adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies and the same are required to be tackled through domestic anti-avoidance rules," the statement said.
GAAR was first proposed in 2010, targeting transactions made specifically to avoid taxes by companies such as Vodafone and Hutchison Essar. It applies to a company in case of abuse of treaty for gaining undue tax benefit.
The rules are aimed at improving transparency in tax matters and help curb tax evasion.
The proposal to apply GAAR will be vetted first by the Principal Commissioner/Commissioner of I-T and at the second stage by an Approving Panel headed by a judge of High Court.
"The stakeholders have been assured that adequate procedural safeguards are in place to ensure that GAAR is invoked in a uniform, fair and rational manner," CBDT said, adding that the government is committed to providing certainty and clarity in tax rules.
CBDT further said that if at the time of sanctioning an arrangement, the Court has explicitly and adequately considered the tax implications, GAAR will not apply to such an arrangement.
It would also not apply if an arrangement is held as permissible by the Authority for Advance Rulings.
"Further, it has been clarified that if an arrangement has been held to be permissible in one year by the PCIT/CIT/ Approving Panel and the facts and circumstances remain the same, GAAR will not be invoked for that arrangement in a subsequent year," CBDT said.
The Tax Department also clarified that the levy of penalty under GAAR would depend on "facts and circumstances of the case and is not automatic".
Finance Minister Arun Jaitley had in his Budget speech in 2015, deferred GAAR implementation by two years and also said that the investments made up to March 31, 2017 shall not be subjected to GAAR, which was to be applied on those claiming tax benefit of over Rs 3 crore.
CBDT today clarified that Rs 3 crore limit of tax benefit calculation for each arrangement cannot be read with a single tax payer as GAAR is with respect to an entire arrangement that has been entered into.
"One good thing is that CBDT has clarified that if LoB sufficiently addresses tax avoidance then GAAR will not apply. Most new treaties being signed are with LOB. Therefore foreign investors have clarity," Ashok Maheshwary and Associates LLP Partner Amit Maheshwari said.
The exceptions carved out for Foreign Institutional Investors (FII) and investors in FIIs alleviated some concerns as the recent clarification gives a ray of hope to the FPI that GAAR shall apply only to abusive or highly aggressive/ contrived arrangements, said Nangia & Co Managing Partner Rakesh Nangia.
Another positive thing is that court approved arrangements are outside the purview of GAAR, Maheshwari said, adding that FPIs would have sufficient clarity on taxation.
In May last year, CBDT had started consultations with stakeholders asking them to give their views where they require clarity before GAAR is implemented. General Anti-Avoidance Rule (GAAR) was part of the 2012-13 Budget speech of the then Finance Minister Pranab Mukherjee to check tax evasion and avoidance. However, its implementation was repeatedly postponed because of the apprehensions expressed by foreign investors.