New Delhi, Jan 14: In a relief to overseas investors, the government has postponed the implementation of the controversial anti tax avoidance provisions, GAAR (General Anti Avoidance Rules), by two years to April 1, 2016.
"Having considered all the circumstances and relevant factors, the government has ...decided that provisions of Chapter 10A of the Income Tax Act (dealing with GAAR) will come into force from April 1, 2016 as against April 1, 2014," Finance Minister P Chidambaram said on Monday.
The GAAR provisions, introduced by the then Finance Minister Pranab Mukherjee in the Budget 2012-13, were aimed at checking tax avoidance by overseas investors. The proposal, however, created controversy, with investors expressing apprehensions that it would result in unnecessary harassment by tax authorities.
The decision to postpone the implementation, Mr Chidambaram said, follows the recommendations of the Shome Committee which was set up by Prime Minister Manmohan Singh in July last year to look into investor concerns.
The government, Mr Chidambaram added, has accepted the major recommendations of the panel with some modifications.
"The modifications that we have done are fair, non-discriminatory, just and strike a balance between interest of revenue and interest of investors. So, all apprehensions should now be set addressed," he said.
The GAAR provisions would override the double taxation avoidance agreement (DTAA) benefits if the arrangements were intended solely to evade taxes, the Finance Minister also said.
Here is the full statement of the finance minister:
The major recommendations of the Expert Committee have been accepted, with some modifications, and the following decisions have been taken by Government:
(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, 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).
The final report of the Expert Committee has been put on the website of the Ministry of Finance today.
