New Delhi: Giving a big relief to overseas investors, the government has postponed implementation of controversial GAAR provisions by two years to April 1, 2016.
"Having considered all the circumstances and relevant factors, the government has ...Decided that provisions of Chapter 10A of the Income Tax Act (dealing with GAAR) will come into force from April 1, 2016 as against April 1, 2014," Finance Minister P Chidambaram said Monday.
The General Anti Avoidance Rules (GAAR) provisions, introduced by the then Finance Minister Pranab Mukherjee in the Budget 2012-13, were aimed at checking tax avoidance by overseas investors. The proposal, however, generated controversy, with investors expressing apprehensions that it would result in unnecessary harassment by tax authorities.
The decision to postpone the implementation, Chidambaram said, follows the recommendations of the Shome Committee which was set up by Prime Minister Manmohan Singh in July last year to look into investor concerns.
The government, Chidambaram further said, has accepted major recommendations of the panel with some modifications.
"The modifications that we have done are fair, non-discriminatory, just and strike a balance between interest of revenue and interest of investors. So, all apprehensions should now be set addressed," he said.
The GAAR provisions, the Minister also clarified, would override the double taxation avoidance agreement (DTAA) benefits if the arrangements were intended solely to evade taxes.
No investor, Chidambaram said, "should now have any apprehension about his investments in India. Only those arrangements, which have been made for the purpose of tax avoidance, will be brought under GAAR, he added.
He also clarified that investments made by Non-Resident Indians (NRIs) will not be covered by the provisions of GAAR.
Following the announcement, the BSE benchmark Sensex rose by about 200 points to 19,864.
About the applicability of the GAAR provisions, he said FII investments seeking benefits under Sec 90 and Sec 90 (A) of the I-T Act (dealing with DTAA) would be covered.
The Minister said only those arrangements which are aimed at only obtaining tax benefit would be considered as 'impermissible arrangement' and would attract GAAR.
As per the original GAAR provisions under Chapter 10 (A) of Finance Bill, 2012, the anti-tax avoidance provisions could be invoked "if one of the purposes" was to obtain tax benefit.
The Minister clarified that there would be a threshold limit of Rs 3 crore of tax benefit for invocation of GAAR, as suggested by the Shome panel.
Moreover, Chidambaram said, that investments made before August 30, 2010, would not attract the provisions of GAAR.
On whether tax officials can look into cases between August 30, 2010, and the date for implementation of GAAR, he said: "They can go back is technically correct. But in order to go, you have to comply with a number of provisions in the I-T Act. If the assessment is completed, you can reopen the assessment only after very strict circumstances."
"This decisions (of GAAR rules modifications) have by and large addressed the concerns that were expressed by investors ... Most of the apprehensions I think have been removed now," Chidambaram said.
Chidambaram said that although it was necessary to have GAAR, the provisions have to be implemented by the tax administration in a manner which is "fair, non-discriminatory and non-adversarial".
The Minister said the government has taken the decision of modifying GAAR provisions after considering the matter for "over three months and 14 days" and the requisite amendments would be made in the I-T Act as part of the Finance Bill to be introduced in the Lok Sabha on February 28.
Under the modified norms, the tax official would issue show-cause notice, with reasons, for invoking GAAR provisions and will also have to give an opportunity to the assessee to explain whether the arrangement was 'impermissible' or not.
The Approving Panel, as proposed in GAAR provisions, would be headed by a serving or a retired High Court judge and its member will include senior officials of the revenue department and individuals with knowledge of tax matters and international tax practices.
The Approving Panel would take into consideration relevant factors before deciding whether the arrangement is impermissible and could attract GAAR provisions, Chidambaram said, adding that its ruling would be binding on the assessee as well as the I-T authorities.
The effort, he said, would be to ensure that the same income is not taxed twice either in the same year or different assessment years.
Application of GAAR, the Minister said, "will be restricted to the tax consequences on that part which is impermissible and not to the whole arrangement".
On whether the GAAR and SAAR (Specific Anti-Avoidance Rules) would apply simultaneously, Chidambaram said, "Only one of them will apply to a given case and the guidelines will be made regarding the applicability of one or the other".
There would be time limits for applications of various provisions under the GAAR, the Minister said, adding that assessees would also have the option to seek opinion from the Authority for Advance Rulings (AAR) whether an arrangement is impermissible.
The tax auditors would also be under obligation to report tax avoidance arrangements, he said, adding, "it is necessary for a developing country, like India, to protect its revenues and tax those (impermissible) arrangements".
The three-member Committee headed by expert Parthasarathi Shome, currently adviser to Finance Minister, had suggested that the implementation for GAAR be postponed for at least three years.