Recommending that General Anti Avoidance Rules (GAAR) provisions should not be invoked to examine the genuineness of the residency of entities in Mauritius, the Prime Minister’s Office-appointed expert committee on Saturday suggested postponing the controversial tax provision by three years.
Among tax havens, Mauritius is the most preferred route for foreign investments due to the liberal taxation regime in the island country.
India has a Double Taxation Avoidance Treaty (DTAA) with Mauritius, which is being misused by investors to route their investments into India.
Headed by Parthasarathi Shome, the panel has recommended that GAAR be applied only if the monetary threshold of tax benefit is `3 crore or more.
The draft report, which was submitted to the Finance Ministry, has sought comments from the stakeholders by September 15.
Meanwhile, the finance ministry has also expanded the scope of the terms of reference of the committee to include all non-resident tax payers instead of only foreign institutional investors. “...GAAR should be deferred for 3 years. But the year 2016-17 should be announced now. In effect, therefore, GAAR would apply from assessment year 2017-18. Pre-announcement is a common practice internationally in today’s global environment of freely flowing capital,” said the draft report of the Shome Committee.
In view of widespread concerns by foreign investors, the government had earlier postponed implementation of GAAR, which was introduced by then finance minister Pranab Mukherjee in his Union Budget for 2012-13, to check tax evasion.
“CII has been advocating a postponement in the introduction of GAAR. We see that the committee has accepted this recommendation, which is most welcome,” said Chandrajit Banerjee, director-general, CII.
The report of the Shome panel, which seeks substantial modification of the original proposals, was made public within days of the Parliamentary Standing Committee of Finance expressing concern over the deterioration of the investment climate.
In its report on current economic situation and policy options, the standing committee had said that investment climate in the country had suffered a serious setback and investor confidence was hit mainly because of the concerns over the impact of retrospective tax laws and GAAR.
Earlier, the Central Board of Direct Taxes had come out with draft guidelines on GAAR, which did not find favour with Prime Minister Manmohan Singh.
India has been expressing concern over misuse of DTAA by foreign investors who route their investments from Mauritius to avoid tax liability.
The committee wants the government to 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.