GAAR right step but defer till industry is ready: Experts

Describing Tax Department's clarifications on GAAR today as a "step in right direction", experts said it could be deferred till the industry is ready for implementation of the tax avoidance rules.
The government has came out with a set of 16 questions clarifying various provisions of GAAR, stating that the provisions will not be invoked if an FPI invests from a jurisdiction for commercial reasons and the main purpose of investing from such jurisdiction is not to avail tax benefits.
"The guidelines are step in the right direction towards execution of GAAR, but has many areas where the guidance could be firmer and more conclusive (like SAAR and GAAR, SPVs in tax free jurisdiction)," KPMG in India Partner and National Head of Tax Girish Vanvari said.

"Needless to add, the best case would be defer GAAR till the industry is ready for its execution," he said.
Some experts said however that investors and FPIs will get the much needed clarity on GAAR with the tax department today clarifying that the anti-abuse provisions on routing of funds will be invoked only if the arrangement has been made with the intension of evading taxes.
The clarifications are timely and helpful as they address some of the immediate concerns of the investor community, said Gokul Chaudhri, Leader, Direct Tax, BMR & Associates LLP.

"This will give some guidance to FPIs who would now have to ensure that they choose a jurisdiction which gives them various non-tax benefits and availability of treaty benefits is not the only purpose though could be one of the purposes," said Deloitte partner Rajesh Gandhi.

As per the clarifications, the General Anti-Avoidance Rules (GAAR), which seek to prevent companies from routing transactions through other countries to avoid taxes, can be invoked through a two-stage process involving a nod at the level of principal commissioner of income tax and a panel headed by a high court judge.
The exceptions carved out for Foreign Institutional Investors (FII) and investors in FIIs alleviated some concerns as the recent clarification gives a ray of hope to the FPI that GAAR will apply only to abusive or highly aggressive/ contrived arrangements, said Nangia & Co Managing Partner Rakesh Nangia.
EY India National Tax Leader Sudhir Kapadia said GAAR clarifications along with the POEM have addressed industry's long standing request for clarity in Government's thinking regarding application of these concepts.

Ashok Maheshwary and Associates LLP Partner Amit Maheshwari said the revised tax treaties with the Netherlands and Cyprus do not have an LoB clause and these jurisdictions may not provide certainty to investors from GAAR application.