A government-appointed panel headed by eminent economist and head of think-tank Indian Council for Research on International Economic Relations (ICRIER) Parthasarathi Shome presented its draft proposals on Saturday on the controversial General Anti Avoidance Rules (Gaar). HT explains the principles and rules needed to counter tax avoidance.
Gaar is aimed at preventing deals or incomes that are structured only to avoid paying taxes.
Isn't tax planning and tax saving legitimate?
In India, the courts have ruled that saving of taxes through permissible instruments of tax planning is legitimate. But tax avoidance is illegal.
Why are anti-avoidance measures necessary?
Experts say that in an environment of moderate rates of tax, it is necessary that the correct base be subjected to tax in the face of aggressive planning and use of opaque low or zero-tax havens for residence as well as for sourcing capital.
Whom does Gaar affect?
Almost anybody and everybody. Corporations may be forced to restructure salaries of employees if taxmen conclude that these were structured only to avoid taxes. Foreign institutional investors (FIIs), who invest through countries such as Mauritius to exploit bilateral tax treaties will be affected after GAAR comes into force. It's feared that once Gaar is invoked, FIIs will have to pay capital gains tax for their investment in Indian equities.
How can an individual be affected by Gaar?
In many ways. For example, if you have taken a loan from your spouse for which you are paying an interest, the tax department can conclude that you have structured the loan from a family member only to claim a tax deduction on the interest paid. Your spouse, on the other hand, will pay a lower tax on the interest earned. This may be seen as violating Gaar.
Why was Gaar proposed?
Former finance minister Pranab Mukherjee while presenting the Union Budget for the current fiscal had proposed implementation of GAAR to check tax avoidance. It was proposed with a view to bar companies from aggressive tax planning by using opaque low tax jurisdictions for residence as well as for sourcing capital.
What is the basic criticism against Gaar?
The basic criticism of against Gaar is that it provides a wide discretion and authority to the tax administration which at times is prone to be misused. This vital aspect, therefore, needs to be kept in mind while formulating any GAAR regime.
How do people use tax havens to avoid paying taxes?
The most obvious is to move to the tax haven country and become a resident. The problem has arisen because of 'round tripping' or 'treaty shopping'. Round tripping refers to routing of investments by a resident of one country through the other country back to his own country.
What was the controversy regarding Gaar?
Apart from providing a wide discretion and authority to the tax administration, Gaar has also sparked fears among global and domestic investors, who said the move would choke foreign investment into India.
Why was the Shome panel set up?
In July, the government had set up a committee under Parthasarathi Shome. The panel includes former insurance regulator N Rangachari, economist Ajay Shah and bureaucrat Sunil Gupta to recommend the norms and implementation roadmap on Gaar.
What has the committee recommended?
In a move that will likely soothe the nerves of angry industrialists and anxious investors, the Shome-panel in its draft report submitted on Saturday proposed deferring the rollout of Gaar by three years. It has also proposed that Gaar shall apply only to taxes of more than Rs. 3 crore. This effectively implies that about 6,141 companies with a pre-tax profit of more than Rs. 10 crore will initially come under GAAR's ambit - a move aimed at minimising any adverse impact on smaller taxpayers. The committee, which has to submit its final report by September-end, has invited comments on the draft from all stakeholders by September 15.
What has committee said on investments routed through Mauritius?
It has recommended that Gaar should not be applicable for entities set up in Mauritius. There was a lurking fear among FIIs who invest through countries such as Mauritius to exploit bilateral tax treaties and were worried that they will have to pay to capital gains tax for their investment in Indian stock markets.