Experts want retrospective provisions out of GAAR

Fear these might be used to harass honest taxpayers

Ahead of the general anti-avoidance rules (GAAR) on tax kicking in from the next financial year, many feel the government should remove the retrospective provisions in the rules.

A proposed panel of officials that would be set up to decide applicability of GAAR might be used to harass honest taxpayers, said experts.

Although GAAR would be applicable prospectively from April 1, 2017, continued benefits arising out of transactions entered into prior to that would be denied the benefits, they said. GAAR is a set of rules designed to give Indian authorities the right to scrutinise and tax transactions they find are structured solely to avoid taxes. It also gives the tax department the power to override tax treaties. "As GAAR stands, continued benefits such as those of depreciation, interest claims arising out of transactions such as securitisation or sale/sale back, lease in/lease out entered into prior to the Rules coming into force, may be denied. To that extent there is a bit of retroactivity in the provisions," said Rahul Garg, leader-direct tax, PwC. Another argument was related to the decision-making panel that would decide if GAAR provisions would be applied in a case. Experts said industry representatives or at least officials from the ministry of commerce and industry should be part of the panel.

"One would have to keep in mind that even if an investment is made before March 31, 2017, but if certain events such as conversion of debentures to shares, bonus issue, etc, occur after that date, there could still be questions around applicability of GAAR in such cases," said Rajesh H Gandhi of Deloitte. He added that determining what constitutes commercial substance remained another challenge as no objective tests have been laid down.

"Similarly there could be issues around protection from GAAR when specific anti-avoidance rules in the treaty are complied with, whether treaty benefits would be available on transactions reclassified under GAAR and TDS related penalties against payer if GAAR is invoked against recipient of income. Clarifications on these issues will be welcomed by taxpayers."

The tax department has sought stakeholders' feedback on provisions requiring clarity, ahead of the announcement of the guidelines for implementation. The last date for stakeholder to give feedback is June 30. The tax department has, however, asked stakeholders to refrain from giving references of "hypothetical situations".

Experts also argued for an amendment to ensure that GAAR be implemented prospectively from April 1, 2017, instead of August 2010. India and Mauritius have amended their bilateral tax treaty, giving New Delhi the right to impose capital gains tax on investment in shares. While investments will be exempted till April 2017, 50 per cent of the tax rate, which is 7.5 per cent, would be imposed for two years on those qualifying the limitation of benefits (LOB) condition in Mauritius in the previous year. One of the criteria for LoB is that the company concerned should have invested Rs 27 lakh in the island nation.