Postpone GAAR by three years, says expert committee

New Delhi: The expert committee on General Anti Avoidance Rules (GAAR) today recommended postponement of the controversial tax provision by three years and abolition of capital gains tax on transfer of securities.

As a step towards reassuring global investors, the Committee in its draft report, suggested that GAAR provisions should not be invoked to examine the genuineness of the residency of entities in Mauritius.

Mauritius is the most preferred route for foreign investments because of the liberal taxation regime in the island country. India has a double taxation avoidance treaty with Mauritius.

[caption id=“attachment_439610” align=“alignleft” width=“380”]  Good times for the next three years? Reuters[/caption]

The Committee, headed by Parthasarathi Shome, has recommended that GARR be applicable only if the monetary threshold of tax benefit is Rs 3 crore and more.

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The draft report, which was submitted to the Finance Ministry, has also sought comments from the stake holders by 15 September.

The Shome Committee was set up by Prime Minister Manmohan Singh to address the concerns of foreign investors.

Meanwhile, the Finance Ministry has also expanded the scope of the terms of reference of the committee to include all non-resident tax payers instead of only FIIs.

The draft report of the Shome committee said: “…GAAR should be deferred for 3 years. But the year, 2016-17, should be announced now. In effect, therefore, GAAR would apply from assessment year 2017-18. Pre-announcement is a common practice internationally, in today’s global environment of freely flowing capital”.

In view of wide-spread concerns by foreign investors, the government had earlier postponed implementation of GAAR, which was introduced by the then Finance Minister Pranab Mukherjee in his Budget for 2012-13 to check tax evasion.

The report of the Shome Committee, which seeks substantial modification of the original proposals, was made public within days of Parliamentary Standing Committee of Finance expressing concerns over deterioration of investment climate.

In its report on Current Economic Situation and Policy Options, the Standing Committee had said that investment climate in the country has suffered serious setback and investors confidence was hit mainly because of the concerns over the impact of retrospective tax laws and GAAR.

Earlier, Central Board of Direct Taxes (CBDT) had come out with draft guidelines on GAAR which did not find favour with Prime Minister Manmohan Singh, who was looking after the Finance portfolio. He had announced setting up of Shome panel to come up with fresh report after talking to stake holders.

In order to address the concerns of Mauritius-based investors, the Shome panel has suggested that the provisions of the GAAR should not be invoked to “examine the genuineness of the residency of an entity set up in Mauritius”.

The draft further said that the government should retain the provisions of the CBDT circular, which was issued in 2000, on acceptance of Tax Residence Certificate (TRC) issued by the Mauritius.

“…if Government cannot accept it (proposal to abolish capital gains tax on transfer of listed securities) on political economy grounds, a second best alternative would be to retain…the Circular accepting Tax Residence Certificate issued by the Mauritius authorities”, the report said.

India has been expressing concern over misuse of Double Taxation Avoidance Agreement (DTAA) by foreign investors who route their investments from Mauritius to avoid tax liability.

The Committee wants, “the Government should abolish the tax on gains arising from transfer of listed securities, whether in the nature of capital gains or business income, to both residents as well as non-residents. In order to make the proposal tax neutral, the Government may consider to increase

the rate of Securities Transaction Tax (STT) appropriately”.

PTI