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GAAR: Shome Committee Draft

Published on Mon, Sep 03,2012 | 15:26, Updated at Mon, Sep 03 at 15:29Source : 

EY's tax team has analysed the suggestions put forth in the GAAR 2nd Draft Report. Here is a short note on the EY report...

The Finance Act 2012 (FA 2012), contains a number of far reaching proposals to amend the Indian Tax Laws (ITL), including proposal to fast forward General Anti-avoidance Rule (GAAR) from Direct Tax Code Bill 2010 (DTC) through which there was proposal to introduce GAAR.

In deference to various representations, application of GAAR provisions were already deferred to 1 April 2013. One of the main reasons for deferral, as clarified by Finance Minister, was to provide more time to taxpayers and tax administration to address all related issues.

During DTC regime itself, in February 2012, Central Board of Direct Taxes (CBDT) had constituted a Committee with reference terms (i) to provide recommendations for formulating guidelines to implement the provisions and (ii) to draft a circular so as to ensure that GAAR is not applied indiscriminately.

The Committee had, after due examination, provided its comments to CBDT on 28 June 2012 on various facets of GAAR provisions by release of Draft GAAR Guidelines.

The Prime Minister then constituted an Expert Committee (EC) on GAAR on 13 July 2012 under the chairmanship of Dr Parthsarthy Shome to vet and rework the Guidelines based on comments from various stakeholders and general public. The EC was, inter-alia, asked to furnish the second draft of GAAR Guidelines by 31 August 2012. This task was completed in a time-bound manner by the EC which submitted its report (Expert Committee Report or ECR) to the Government on 31 August 2012. Comments and suggestions on ECR are invited by 15 September 2012.

It is heartening to note that EC has fairly recognized the need to address various apprehensions of stakeholders. It recognises the need for adequate safeguards to withstand the possible misuse of wide discretion given to the Tax Authority. It also emphasizes that GAAR is an instrument of deterrence and is not to be used for revenue generation.

If international experience is any guide, task of introduction of GAAR provisions through consultative process and formulation of Guidelines for its implementation has always been a challenge given the need for striking fine balance between the desire of protecting tax base against aggressive planning, while putting a check on discretionary exercise of power so as not to create an environment of uncertainty. The exercise becomes delicate because conferment of certain discretion is inherent in GAAR. The classification of arrangements in the buckets of permissible and impermissible tax avoidance arrangements in an objective or transparent manner is yet another major challenge.

In the midst of these constraints, the ECR represents positive step towards allaying the fears of investors and providing a policy direction to Government and Tax Administration. The proposal to defer GAAR to allow time for change of mindset of  taxpaying community and to prepare tax administration is highly salutary. The insertion of overarching principles as a pre-condition of GAAR applicability is reflective of the true intent of GAAR. Proposals to grandfather existing investments, to protect tax efficiency of fund pooling vehicles, to respect tax treaties with SAARs, to uphold validity of Circular 789 issued in the context of Mauritius entities etc should go a long way to rehabilitate investor confidence. In addition, the EC has recommended evolution of negative list of situations in which GAAR should not apply. The minimum threshold level of tax benefit for GAAR trigger is also likely to keep large number of small taxpayers outside of GAAR scrutiny. Combined with the benefit of multiple examples and overseeing of the initial proposals of Tax Authority by an independent approving panel, most bonafide cases should be happy with the proposals. Some items on the wish list may, however, still remain open. Submission of selective comments to the EC will still pave a way towards more comprehensive final report due for submission on 30th September 2012.

Please find attached EY's analysis of the Shome Committee Draft Report on GAAR

Attachments : EY Tax Alert_Expert Committee Recommendations on GAAR.pdf

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