Govt may dilute GAAR proposals, target tax havens

Taxman, not just taxpayer, must prove avoidance or otherwise non-tax officials also on deciding panel

The finance ministry may dilute some provisions of the proposed General Anti-Avoidance Rule (GAAR) to allay investors’ fears about excessive powers to the taxman under the regime.

The rules may be worded in a manner that the onus to prove tax avoidance is also on the tax officials and not only on the taxpayer as proposed in the Budget. The ministry may also consider suggestions to include people other than income tax department officials in the approving panel, which will assess whether GAAR will be invoked or not.

GAAR, along with retrospective amendments of the Income Tax Act, has created a scare among the industry on the ground that these proposals might hurt investor sentiment. GAAR would be invoked if a deal’s purpose is proved to be avoidance of tax.

THE PROPOSED GAAR CHANGES
A list of the proposals and how they stand

* Rules will not be specific to any country or asset class; will be applicable to all foreign portfolio investment

* Govt will not go after P-note holders but if an FII is taxed, the post-tax profit of the P-note holder will come down

* Onus to prove whether it’s a case of tax avoidance or not will be on the tax department and the taxpayer

* Rules will not tax transactions retrospectively; will come into effect from assessment year 2013-14

* Treaty-overriding provisions to stay, to affect ‘fly-by-night’ investors coming via tax havens

* Approving panel deciding on tax avoidance may comprise independent people other than tax officers

However, other provisions of GAAR with regard to taxation of investors routing investments through tax havens may not be relaxed. The finance ministry is firm that any investment through a low-tax or no-tax jurisdiction, like Mauritius, made by an investor from another country mainly to obtain tax benefit, would not be spared by the tax department. Thus, proposals to include all kinds of foreign investments, including portfolio investments, and treaty overriding provisions may remain.

“Even now, the onus is not entirely on the taxpayer. Tax officials also have to prove it but the proof can only come from the investor. However, if there are any apprehensions, we can try making it clearer in the rules. There will be adequate safeguards to ensure that genuine investors are protected,” said a finance ministry official, who requested anonymity.

Currently, GAAR proposals say it would be presumed that obtaining tax benefit is the main purpose of an arrangement unless otherwise proved by the taxpayer.

However, the tax department will have to support this with with one of the four tests — no arm’s length transaction, misuse of tax law, lack of commercial substance, purpose of a deal being not being bonafide — to declare an arrangement  “impermissible” and invoke GAAR. What is “permissible” and “impermissible” would be defined more clearly in the rules to be drafted by a  panel under the finance ministry.

Officials said any set-up in a tax haven that was merely on paper, with the actual operations carried out from some other country, would be impermissible.

To invoke GAAR provisions, the assessing officer will have to make a reference to the commissioner, who upon hearing the taxpayer will refer the matter to the approving panel if the reply is not satisfactory. It is proposed that the approving panel would comprise tax officers of the rank of commissioner or above. The ministry may now consider including somebody from the judiciary in the panel.

Officials, however, stress that no other country in the world has people other than tax officials on such a panel, except Australia, where it is not mandatory for the assessing officer to refer a case before invoking GAAR. Officials say other countries do not have senior tax officers on the panel.

GAAR is a provision proposed under the Direct Taxes Code (DTC). Its timing has been advanced since DTC is yet to come. The Parliamentary standing committee on finance, in its report on DTC had noted that since the panel was a purely departmental body, “it will be fair and just, if the review is done by a more independent body”. It had also said the onus of proving tax avoidance should rest with the department and not with the taxpayer.

Fearing a negative impact on the investor sentiment, the industry has been demanding that GAAR provisions be suitably amended.