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India To Defer GAAR Implementation

by Mary Swire,, Hong Kong

09 May 2012

India’s Finance Ministry is to push back the implementation of its controversial general anti-avoidance rule (GAAR) for a year and will amend some of its key provisions.

Finance Minister Shri Pranab Mukherjee made the announcements in his opening remarks on the parliamentary debate on the Finance Bill 2012, which contains elements of the GAAR scheme.

Mukherjee proposed deferring the implementation of the GAAR provisions by one year. This, he said, will provide more time to both taxpayers and the tax administration to address all issues relating to the system. The provisions will now apply from the 2013-14 financial year, which begins next April.

The changes have been made following Mukherjee’s examination of the recommendations made by a government Standing Committee on the GAAR provisions included in the Direct Tax Code (DTC) Bill 2010.

Under the reforms, the onus of proof will be removed entirely from the taxpayer to the Revenue Department before any action can be initiated under the GAAR. An independent member will be introduced to the GAAR approving panel to ensure objectivity and transparency. One member of the panel will have to be an officer of the level of Joint Secretary or above the Ministry of Law. Lastly, the changes provide that any taxpayer (resident or non-resident) can approach the Authority for Advance Ruling for a ruling as to whether an impending arrangement is permissible under the GAAR.

Mukherjee also acknowledged the establishment of a committee under the Chairmanship of the Director General of Income Tax (International Taxation), which is to give recommendations on the formulation of rules and guidelines for the GAAR’s introduction. He said that the committee has already engaged in several rounds of discussion with stakeholders including Foreign Institutional Investors (FIIs). It is due to submit its recommendations by the end of the month.

Commenting on the news, Mukesh Butani of Taxand India, said: “The Finance Minister’s proposal to undertake substantive amendments are bold and laudable. Besides deferring the GAAR provisions by a year to coincide with DTC, he has accepted the most important proposal of the standing committee on DTC, to shift the onus from the tax payer to the tax administration. This amendment will come as a relief to taxpayers who echoed scepticism on the implementation of GAAR. The one year deferral means that we will have a debated piece of legislation. I would anticipate that the enabling rules are thrown open for public debate such that the views of businesses and chambers are factored in for such substantive changes in law.”

“The amendment to provide a third independent member on the GAAR panel by way of the Joint Secretary from the Law Ministry is a step in the [right] direction and will provide some level of independence. Finally, testing a transaction which could potentially attract GAAR with the Advance Ruling authority would mean that taxpayers who wish to seek certainty on law can approach this quasi judicial forum and it would apply to all forms of transactions,” Butani concluded.

TAGS: tax | business | India | tax avoidance | law | corporation tax | offshore | multinationals | legislation | tax reform | legislation amendments

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