Last week, Prime Minister Manmohan Singh set up an expert panel, under economist Parthasarathi Shome, to examine the controversial General Anti Avoidance Rules (GAAR). An explainer on the issues involved:
GAAR or General Anti-Avoidance Rule is aimed at preventing deals or incomes that are structured only to avoid paying taxes.
Why is GAAR required? 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?
According to some experts, in an environment of moderate rates of tax, it is necessary that the correct tax base be used for calculating taxes in the face of aggressive planning and use of opaque low tax jurisdictions 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 use of 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. What are the other fears?
It also sparked fears among global and domestic investors, who said the move would choke foreign investment into India
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 for the purpose of paying taxes. 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.
The finance ministry had set up a committee to look into it. What’s the status on that?
Last month, the committee headed by director general of the income tax (international taxation) had published draft rules for GAAR recommending a host of measures. It has recommended that GAAR should be made applicable only from April 1, 2013.
Only income or transactions beyond a certain threshold limit will come under the provisions of GAAR. The threshold limit, however, has not yet been stipulated, but the committee made it clear that GAAR should not be applied retrospectively.
Foreign institutional investors (FIIs) who invest through countries such as Mauritius to exploit bilateral tax treaties, however, will be affected after GAAR comes into force. The committee is of the view that GAAR should not be invoked on participatory notes or P-Notes.
What is the mandate of the new committee set up by the PMO?
The Prime Minister’s Office (PMO) had clarified, a day after the finance ministry published draft guidelines, that it will look into the matter. The panel, headed by Shome, head of think-thank ICRIER, includes former insurance regulator N Rangachari, economist Ajay Shah and bureaucrat Sunil Gupta. It will submit its norms and implementation roadmap on GAAR by September 30.