Wednesday, April 25, 2012

GAAR – Ambiguity Persists

 Introduction of the a contentious  new tax proposal by the government, called the General Anti-Avoidance Rule, has dented the market sentiments and is likely to hurt foreign investments too.

The General Anti-Avoidance Rule was introduced with the objective to "counter aggressive tax avoidance schemes."  It empowers officials to deny the tax benefits on transactions or arrangements which do not have any commercial substance or consideration other than achieving tax benefit. It could also be used by the government to target participatory notes (P-Notes).  GAAR would also empower the tax authorities to overcome the Double Taxation Avoidance Agreement (DTAA) and deny the benefits of Tax Avoidance to the FIIs which route their investment through Mauritius which is a Tax Haven.

On the other hand, the Indian Government has reiterated many times that India is not a Tax Haven and would take cautious steps in consolidating this stance. The government has also stated that the double taxation avoidance treaty has been exploited by foreign investors, especially in the capital market, to avoid capital gains taxes in India but with GAAR they are bound to prove the substance of their business in Mauritius.

It is not only a domestic issue rather tax avoidance is of international concern now and several countries have either already codified GAAR in their tax statutes or are in the process of doing so.  GAAR has been a part of the tax code of Canada since 1988, Australia since 1981, South Africa from 2006 and China from 2008. Australia and China also have SAAR (Specific Anti Avoidance Rule) in place to check abuse of tax treaties and transfer pricing.

But the lack of clear indication of how and on whom the GAAR would be imposed, this is what is spreading an alarming negative sentiment across the economy. Then the concern of treaty override needs to be handled carefully otherwise it would lead to violation of international convention. Analysts also feel that the timing of introduction of GAAR was not appropriate when the image of our country was reeling with negativity like policy paralysis, CAD and Fiscal Deficit.

So let’s wait and watch how the Finance Ministry would act on this ambiguous proposal.

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