Finance Ministry may soften GAAR, retro blow

Shome panel recommendations may not be accepted completely

The finance ministry may dilute income tax provisions with regard to retrospective taxation and General Anti Avoidance Rules (GAAR), but it is not likely to completely toe the line of Shome panel when the amendments to the Income Tax Act are moved in the Winter Session of Parliament.

The Parthasarathi Shome panel today submitted its final report on retrospective taxation which recommended foreign companies going for mergers & acquisitions in India should pay tax prospectively.

The Central Board of Direct Taxes (CBDT) is of the view that there could be some practical difficulties in fully accepting the recommendations of the Shome panel on both retrospective taxation and GAAR.

The finance ministry was expecting Rs 35,000 to Rs 40,000 crore by way of retrospective tax on indirect transfer of Indian assets by non-residents. If the validation clause is removed a large part of it will not come to it. Vodafone, which had the Supreme Court ruling in its favour, may not have to fear a tax notice demanding Rs 8,000 crore on its 2007 deal with Hutchison.

The Shome panel had said if there is retrospective taxation tax should be collected from seller and the interest and penalty should be waived off. This will also save Vodafone, but the tax department may face many administrative and legal challenges in collecting tax from Hutchison.    

The finance ministry may shortly announce GAAR guidelines which tell under what circumstances the rules would be invoked, but the deferment will happen only after taking approval of Parliament. Finance Act 2012 had given April 1, 2013 date for introduction of GAAR.