The finance ministry is set to make the General Anti-Avoidance Rules (GAAR),which were amended in the Finance Act 2013,even more business friendly by incorporating more of the recommendations made by the Parthasarathi Shome committee in the rules that would be notified shortly.
One of the two major relaxations that would be notified through rules is a threshold of R 3 crore for invoking GAAR. If the tax benefit sought through a business arrangement is less than this threshold,GAAR will not be applied to deny tax benefit to it.
The rules to be notified will also exempt all foreign institutional investments (FII) in listed securities in India made before August 30,2010,from the purview of the measures meant to check aggressive anti-avoidance.
FIIs holding such securities bought prior to the cut-off date will not be asked to pay the 15% short-term capital gains tax even if they sell them after GAAR comes into force from 2015-16 fiscal.
These recommendations did not require an amendment to the Income Tax Act. So,it was decided to include these in the rules,not in the Act, explained a person privy to the development.
Finance minister P Chidambaram got the GAAR provisions modified this year through the Finance Act,2013,to give relief to the industry,mainly by deferring its implementation to 2015-16 fiscal from 2013-14 fiscal.
The amended law also said the rules meant to deny tax benefits to a business arrangement will be applied only if its main purpose is to avoid tax,not one of the main purposes as was the case as per the original GAAR version introduced in 2012.
The amended provision also made the history and the tax payment track record of assessees a relevant,though not sufficient,factor while deciding to apply GAAR.
Finance Act 2013 had also made the directions of a judicial panel on whether to invoke GAAR or not binding on both the assessment officer and the tax payer,unlike the earlier provision making it binding only on the officer.
The government made the norms to prevent tax avoidance less rigorous for the industry in order to restore the confidence of the global investor community,which found the original anti-avoidance scheme unfriendly.
The move was in line with Chidambaram’s promise of a stable and non-adversarial tax regime. While the broad guiding principle remains a stable tax regime,India is making its tax laws more foolproof in areas such as cross-border transactions and domestic deals between related parties.
India is among nations like UK,Australia and Canada that introduced GAAR to deny tax benefits to investors setting up business arrangements that are legal in form but not in substance.