In a move likely to soothe frayed nerves at India Inc and its investors, a government-appointed panel on Saturday proposed deferring by three years controversial rules designed to clamp down on company transactions and income structured purely to avoid taxes.
Uncertainty over the General Anti-Avoidance Rules (GAAR), announced in Pranab Mukherjee’s last budget, has been identified by foreign investors as a factor choking investment into the country.
The panel, set up in July to frame a roadmap on the tax avoidance proposals, has proposed that GAAR should not have retrospective effect and shall apply only to taxes of more than Rs. 3 crore.
This implies that about 6,000 companies with a pre-tax profit each of more than R10 crore will initially come under GAAR.
The committee, which has to submit its final report by September-end, has invited comments on the draft from all stakeholders by September 15.
“GAAR should be deferred for 3 years. But the year, 2016-17, should be announced now,” said the draft report of a panel chaired by Parthasarthi Shome, head of think-tank Indian Council for Research in International Economic Relations (ICRIER).
The GAAR provisions had triggered howls of protest from global and domestic business leaders as it can potentially affect a wide range of businesses.
For instance, many companies, experts had said, may have been forced to restructure salaries of employees if taxmen conclude that these were structured only to avoid taxes.
There was also a lurking fear among foreign institutional investors (FIIs) who invest through countries such as Mauritius to exploit bilateral tax treaties who were worried that they will have to pay to capital gains tax for their investment in Indian stock markets.
On Saturday, the Shome panel put to rest such fears. “With respect to Mauritius... GAAR provisions shall not apply to examine the genuineness of the residency of an entity set up in Mauritius,” the committee said.
Besides, the panel has made it clear that GAAR should not invoked on participatory notes (P-Notes) or offshore derivative instruments designed to aid investors who do not want to register with SEBI and disclose their identities.
According to market estimates P-notes account 10-15% of the total FII holdings in India. “GAAR provisions would not be invoked in the case of a non-resident who has invested, directly or indirectly, in the FII i.e. where the investment of the non-resident has underlying assets as investments made by the FII in India,” it said.
Business leaders, expectedly, welcomed the proposals.
“A pragmatic and practical view has been taken in recommending a deferral in the implementation of GAAR at a time when business sentiment desperately needs a boost,” said RV Kanoria, president of industry body Federation of Indian Chambers of Commerce and Industry (Ficci).