Budget 2015: GAAR may be deferred by two years to boost business sentiment

NEW DELHI: The much-feared general anti avoidance rules (GAAR) could be deferred by about two years so that business sentiment is allowed to improve in India but will need to be rolled out in some form or the other by 2017, in sync with the international framework on preventing treaty abuse that’s been accepted by the G20. Globally there has been agreement on moving toward a multilateral framework and complementing this with domestic laws to deal with treaty shopping.

The OECD plan on Base Erosion on Profit Shifting (BEPS) has seen proactive participation from India, which has been at the forefront of those seeking action on crossborder tax avoidance and sharing of information. “A holistic view will be taken on GAAR… There is a demand but a balance needs to be struck,” said a government official.

Industry would prefer GAAR to be scrapped altogether, but international pledges mean it will have to take action on this front in two years, which is all the breathing time India has.There have been discussions about removing impediments to investment ahead of the budget and deferral of GAAR has figured in these as the Narendra Modi government is keen to attract overseas flows to put the country on a highgrowth trajectory.

GAAR, which aims to minimise tax avoidance for investments made by entities based in tax havens, is to come into effect on April 1 but the government doesn’t want to jeopardize the investment drive just as its economic agenda gets under way, especially since sentiment continues to remain fragile.

Tax experts say it is largely an issue of implementation. “Deferment of GAAR would avoid any uncertainty that could creep into tax outcome due to subjectivity involved in GAAR. Our tax system should first be able to contain disputes on tax matters in the current regime before we think of GAAR,” said Rahul Garg, leader, direct tax, PwC India.

“The government needs to see if it would add to revenues in a big way,” said Sudhir Kapadia, national tax leader, EY. The provisions were introduced in the 2012-13 budget by then finance minister Pranab Mukherjee to check tax avoidance and were originally planned to be implemented from April 1, 2014. However, Mukherjee, who is now India’s president, deferred its implementation by a year after protests by foreign investors and domestic industry. GAAR implementation was further postponed by his successor P Chidambaram to assessment year April 1, 2016.

The current OECD plan is to have a multilateral rule on the limitation of benefits in tax treaties to ensure that they are not abused by investors from third countries.

“Treaty abuse, like the abuse of domestic law, is best addressed through a combination of specific anti-abuse rules, which provide greater certainty but can only deal with known abusive strategies, and general anti-abuse rules or judicial doctrines, which are less certain but offer protection against abusive transactions that have not previously been identified or addressed,” the OECD commentary on BEPS said. The G20 finance ministers’ communique on the occasion of their Istanbul meeting upheld their backing for the new BEPS provisions earlier this week.