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GAAR will be effective from April 1, 2017

The Union Finance Ministry has announced that the General Anti Avoidance Rule (GAAR) will be effective from the 1 April, 2017.

In this regard Income Tax (IT) department has issued a slew of clarifications on implementation of GAAR, seeking to address concerns of foreign investors over implementation of the anti-evasion measure.

GAAR seeks to prevent companies from routing transactions through other countries to avoid taxes. The rules are framed mainly to minimize and check avoidance of tax. India will be the 17th nation in the world to have laws that aim to close tax loopholes.  At present, GAAR is in force in nations like Australia, Singapore, China and the UK.

Issued clarifications
  • GAAR seeks to give the IT department powers to scrutinize transactions structured in such a way as to deliberately avoid paying tax in India.
  • It will not be invoked in cases where investments are routed through tax treaties that have a sufficient limitation of benefit (LOB) clause to address tax avoidance.
  • It should be noted that LOB clause in tax treaties generally requires investors to meet certain spending and employment criteria to avail the benefits of the treaty.
  • All transactions or arrangements approved by courts and quasi-judicial authorities like the authority for advance ruling and that specifically address the issue of tax avoidance will not be subject to the GAAR test.
  • GAAR will not be applicable on compulsorily convertible instruments, bonus issuances or split/consolidation of holdings in respect of investments made prior to 1 April 2017 in the hands of the same investor.
  • In order to prevent misuse of GAAR provisions by the IT department, adequate safeguards also have been put in place based on which GAAR will be invoked.
  • The proposal to apply GAAR first will be vetted by an officer at the level of the principal commissioner or commissioner of income tax and at the second stage by an approving panel headed by a high court judge.
  • GAAR will not apply on foreign portfolio investor if its jurisdiction is based on non-tax commercial considerations and the main purpose is not to obtain tax benefits.

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Budget Box: Changed GAAR provisions to come into effect from April 2016

As announced in the current Budget, the modified version of controversial General Anti Avoidance Rules (GAAR) provisions will be implemented from April 2016. The modified provisions maintain the basic thrust and purpose of GAAR.

The government had formed an expert committee chaired by Parathasarthi Shome to give recommendations on the anti-avoidance tax proposals. The panel had recommended to defer GAAR by 3 years and abolition of short-term capital gains tax.

Impermissible tax avoidance arrangements will be subjected to tax after a decision is made through a well laid out procedure involving an assessing officer and an Approving Panel headed by a Judge.

The Finance Bill 2013—14 proposes to set up a Tax Administration Reform Commission to review the application of tax policies and tax laws and submit periodic reports that can be implemented to strengthen the capacity of our tax system.

A Standing Council of Experts will be set up in the Finance Ministry to examine the international competitiveness of the Indian financial sector. It will periodically examine the transaction costs of doing business in the Indian market, and provide suggestions to Government for necessary measures.

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GAAR amendments finalized: Chidambaram

Finance Minister P.Chidambaram held that the amendments to General Anti-Avoidance Rules (GAAR), have been finalized.

GAAR, was proposed in the 2012-13 Budget in order to preventing tax evasion. But it aroused sharp reactions from foreign as well as domestic investors who feared that unchecked powers to taxmen would result in harassment of the investors. Thus, the government subsequently appointed a committee headed by tax expert ‘Parthasarthi Shome’ to look into their matter.

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