Keen to restore investor confidence, the finance ministry is likely to whittle down the scope of the General Anti-Avoidance Rules (GAARs) so that genuine tax planning isn’t impacted by these dreaded rules.
The ministry, sources said, would clarify soon that GAARs incorporated in the Income Tax Act in 2012 would be invoked only as “a last resort” if there is no other provision in law that can be used to question a dodgy business arrangement aimed at saving tax. Also, the threshold for tax benefits, under an arrangement for tax officials to invoke GAARs, may be raised significantly from the current Rs 3 crore.
Sources said tax symmetry may be offered in GAAR-enabled income adjustment which would mean that the same amount was not taxed twice, that is, in the hands of both parties to a transaction.The ministry is also likely to enlist clear examples of business arrangements where GAARs would be applied.
The idea is to make enough changes in the anti-avoidance provisions in the Income Tax Act and the I-T Rules to foil abusive tax arrangements, even while allowing a firm the freedom to do responsible tax planning, the sources added. “The finance minister will review all aspects of GAARs, not just its date of implementation. It is a comprehensive review,” the minister of state for finance, Nirmala Sitharaman, told FE.
Former finance minister P Chidambaram too had made a promise to the effect that GAAR would be used sparingly but subsequent changes in rules, industry and analysts said, hardly reflected that assurance, although the then minister had accomodated certain safeguards to reduce the rigours of GAAR.
GAARs are intended to prevent businesses from reducing tax liability through legal loopholes and arrangements that are legal in letter but not in spirit. These rules empower the taxman to lift the corporate veil of the tax payer and re-characterise transactions if needed.
Sources said the threshold of tax benefits for GAARs was being reviewed as even small-scale enterprises could have transactions with tax implications above the present Rs 3-crore limit while GAARs are essentially aimed at avoiding large evasions. Experts FE spoke to said the threshold should be somewhere between Rs 10 and 25 crore.
“The government could incorporate more of the suggestions given by the Shome Committee and industry to make GAAR more balanced,”said Rahul Garg, leader, Direct Tax Practice, PwC India. He said that tax payers could be allowed to secure advance rulings on whether a proposed transaction could attract the tax anti-avoidance provisions.
“The Shome Committee recommendations which comprehensively dealt with the implementation of GAAR should be accepted by the government in to considering the far reaching nature of these anti-abuse rules and our history of disputes in other areas of taxation, specially in transfer pricing,” said KR Sekar, partner, Deloitte Haskins & Sells.
He said that GAARs should be sparingly used continued…