India Issues Draft Guidelines For Tax Rule

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IIndia Issues Draft Guidelines For Tax Rule - WSJ.com

NEW DELHI – India's government Thursday issued draft guidelines for implementing a controversial rule introduced to fight tax evasion, suggesting that the provisions be applied from April 1, 2013, and that the onus of proving wrongdoing should be on the authorities.

A panel of seven members proposed that to avoid "the indiscriminate application of the GAAR [General Anti-Avoidance Rules] provisions and to provide relief to small taxpayers, there should be monetary threshold for invoking the GAAR provisions," the Central Board of Direct Taxes said as part of the draft guidelines.

The guidelines were formulated by a panel of seven members who were asked to suggest safeguards so that the GAAR provisions are not applied indiscriminately in every case.

The anti-avoidance rules and a retrospective tax amendment--both proposed in the federal budget in March--have rattled investor confidence, sparked a wave of criticism both domestically and overseas, and led to flight of capital. The two were seen as desperate means by a cash-hungry government to raise funds to rein in its yawning budget deficit. Many investors had said that the anti-avoidance rules, which give authorities powers to scrutinize any deal that they feel has been structured to evade taxes, would give unbridled power to tax authorities and that all deals could be viewed with suspicion. Some feared it would be used to target transactions routed through jurisdictions such as Mauritius with which India has a double-tax-avoidance treaty.

The sharp criticism forced the government to defer implementation of GAAR by a year to April 1, 2013.

Prime Minister Manmohan Singh, who took charge as the finance minister Wednesday, has already identified "problems on the tax front" as having contributed to a "general negative mood."

The panel came out with its draft guidelines after meeting various representatives of foreign institutional investors and other stake holders to understand their concerns.

Earlier Thursday, the government denied reports that it planned to scrap the controversial rules, but said will it resolve contentious issues regarding the tax proposal in the next two to three weeks. It said that draft guidelines on implementing the rules would be released late Thursday.

Finance Secretary R.S. Gujral told reporters that the draft guidelines will be open for comments for 15 days, and that final guidelines will follow.

The panel suggested that GAAR provisions should be invoked on a foreign institutional investor, or FII, if it chooses to take a treaty benefit, "but would not in any case be invoked in the case of the non-resident investors of the FII.

It said that the GAAR provisions are meant for cases of tax evasion, not avoidance, or tax mitigation, where a tax payer takes advantage of a fiscal incentive allowed by a tax law.

In a case where only a part of an arrangement is not allowed, the provisions will be limited to only that part, the panel proposed.

"Consistency of approach" is essential for invoking GAAR, and the panel felt that there should be "absolute certainty" about the time limits during which the various actions under the provisions are to be completed.

 

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Official press release is here Press Information Bureau English Releases

A small excerpt here

GAAR – Note for Guidelines

1.0 While introducing the provisions of General Anti Avoidance Rule (GAAR) in the Income-tax Act, it was mentioned in the Explanatory Memorandum to the Finance Bill, 2012 that the question of substance over form has consistently arisen in the implementation of taxation laws. In the Indian context, judicial decisions have varied. While some courts in certain circumstances had held that legal form of transactions can be dispensed with and the real substance of transaction can be considered while applying the taxation laws, others have held that the form is to be given sanctity. There are some specific anti-avoidance provisions, but, prior to introduction of GAAR, general anti-avoidance has been dealt in specific cases only through judicial decisions. In an environment of moderate rates of tax, it is necessary that the correct tax base be subject to tax in the face of aggressive tax planning. Internationally, several countries have codified the "substance over form" doctrine in the form of General Anti Avoidance Rule (GAAR) and are administering statutory GAAR provisions.

1.1 The General Anti Avoidance Rule (GAAR) is a codification of the proposition that while interpreting the tax legislation, substance should be preferred over the legal form. Transactions have to be real and are not to be looked at in isolation. The fact that they are legal does not mean that they are acceptable with reference to the meaning in the fiscal statute. Where there is no business purpose, except to obtain a tax benefit, the GAAR provisions would not allow such a tax benefit to be availed through the tax statute. These propositions have otherwise been part of jurisprudence in direct tax laws as reflected in various judicial decisions. The GAAR provisions codify this 'substance' over 'form' rule.

1.2 The basic criticism of a statutory GAAR which is raised worldwide is that it provides a wide discretion and authority to the tax administration which can cast an excessive tax and compliance burden on the taxpayer without commensurate remedies. One of the methods by which this can be addressed is to provide guidance on what the provisions entail and how they would be administered. These guidelines are meant to provide explanations and clarity regarding the GAAR provisions.

2. Tax avoidance vs Tax Evasion

2.1 Tax evasion is generally the result of illegality, suppression, misrepresentation and fraud. Tax avoidance is the result of actions taken by the assessee, none of which or no combination of which is illegal or forbidden by the law itself. The GAAR provisions do not deal with cases of tax evasion. Tax evasion is clearly distinct from tax avoidance and is already prohibited under the current provisions of the Income-tax Act.

3. Tax avoidance vs Tax mitigation

3.1 'Tax mitigation' is a situation where the taxpayer takes advantage of a fiscal incentive afforded to him by the tax legislation by actually submitting to the conditions and economic consequences that the particular tax legislation entails. An example of tax mitigation is the setting up of a business undertaking by a taxpayer in a specified area such as a Special Economic Zone (SEZ). In such a case the taxpayer is taking advantage of a fiscal incentive offered to him by submitting to the conditions and economic consequences of the SEZ provisions in the Income-tax Act e.g., setting up the business only in the SEZ areas and export from the SEZ area. Tax mitigation, as distinct from tax avoidance, is allowed under the tax statute. The GAAR provisions also do not deal with case of tax mitigation.

4. Analysis of the GAAR provisions

4.1 The provisions relating to GAAR appear in Chapter X-A (sections 95 to 102) of the Act. The provisions allow the tax authority to, notwithstanding anything contained in the Act, declare an 'arrangement' which the assessee has entered into, as an 'impermissible avoidance arrangement'. Once an 'arrangement' has been declared as an 'impermissible avoidance arrangement', the consequence as regards the tax liability would also be determined.

4.2 The provisions give a wide definition of the term 'arrangement'. An 'arrangement' means any step in or a part or whole of any transaction, operation, scheme, agreement or understanding, whether enforceable or not. It also includes the alienation of any property in such a transaction etc. The onus of proving that there is an impermissible avoidance arrangement is on the Revenue.

4.3 An 'arrangement' would be an 'impermissible avoidance arrangement' if,

(a) its main purpose is to obtain a 'tax benefit', and,

(b) it also has one of the following characteristics:

(i) it creates rights and obligations, which are not normally created between parties dealing at arm's length;

(ii) it results in misuse or abuse of the provisions of the tax law;

(iii) it lacks commercial substance;

(iv) it is carried out by means or in a manner which is normally not employed for an authentic (bona fide) purpose.



A 'tax benefit' has been defined to mean

(i) a reduction or avoidance or deferral of tax or other amount payable under the Act or as a result of a tax treaty;

(ii) an increase in a refund of tax or other amount that would be payable under the Act or as a result of tax treaty; or

(iii) a reduction in total income including an increase in loss.

The term "tax benefit" would be the benefit, quantified in terms of tax liability, arising to any party to the arrangement on account of such arrangement.

4.4 The onus of proving that

(A) there is an arrangement,

(B) the arrangement leads to a 'tax benefit',

(C) the main purpose or one of the main purposes of the 'arrangement' is to obtain a 'tax benefit', and

(D) the arrangement has one of the characteristics listed at (i) to (iv) at (b) of 4.3 above is on the revenue.