Finance Minister Pranab Mukherjee’s amendments to the Finance Bill 2012-13, have ensured companies operating their businesses through countries with which India has double taxation avoidance agreements (DTAAs) would continue to enjoy a liberal capital gains tax framework for at least another year without much difficulty. However, once the General Anti-Avoidance Rule (GAAR) is implemented, these would be subject to tax provisions in India.
While moving the amendments to the Bill, Mukherjee announced the GAAR would be applicable from April 1, 2013, and clarificatory amendments proposed in the Bill would not over-ride the DTAA provisions.
Tax experts said as a result of the amendments, companies operating from countries with which India didn’t have DTAAs, would try to shift to countries with which India had such agreements, including Mauritius. “If the GAAR doesn’t come for one year, the old Mauritius circular is not withdrawn, and the Supreme Court ruling in Azadi Bachao matter is available to taxpayers, investment through Mauritius would continue to enjoy treaty benefits,” said Rahul Garg, executive director, Pricewaterhouse Coopers. “And, the situation that existed earlier would continue to be available, in respect of the investment from other treaty countries,” he added.
The finance minister had said the provision in the Finance Bill which sought to retrospectively clarify the provisions of the Income Tax Act relating to capital gains on the sale of assets located in India through indirect transfers abroad, had been intensely debated, both in the country, as well as abroad. “I would like to confirm clarificatory amendments do not override the provisions of the double taxation avoidance agreements India has with 82 countries. It would impact those cases in which transactions have been routed through low-tax or no-tax countries, with which India does not have a DTAA,” he said.
Since the implementation of the GAAR has been postponed by a year, during this period, companies operating from regions India has DTAAs with would continue to enjoy low or no capital gains tax, as applicable in the country.