<div>Companies, foreign institutional investors (FII) and individuals need no longer lose sleep over uncertainties created by the General Anti Avoidance Rules (GAAR). By accepting the Parthasarathi Shome committee’s recommendations almost in their entirety, finance minister P. Chidambaram has allayed most of their concerns.<br /> </div><div>Not only has GAAR been postponed to 2016, there is also a lot of clarity in the rules now. Further, it has been decided that GAAR will not be applicable to FIIs and non-resident investors in FIIs. This should help retain the flow of funds into FIIs, something that had been adversely affected following the announcement of GAAR by former finance minister Pranab Mukherjee in his 2012 budget.<br /> </div><div>Says Rahul Garg, leader of PwC’s indirect tax practice: “Many crucial suggestions of the expert committee have been accepted, such as replacing ‘one of the main purpose’ with ‘main purpose’ test for invoking GAAR; providing for corresponding adjustment; raising GAAR threshold to Rs 30 million; rationalising the test of ‘commercial substance’, etc.” </div><table width="100" cellspacing="5" cellpadding="5" border="0" align="right"><tbody><tr><td><span style="color: rgb(255, 0, 0);"><strong>2016 The year until when GAAR will not be applied.</strong></span></td></tr></tbody></table><div><br /> However, there is still a lack of clarity as to how the new rules apply to tax treaties with Singapore and Mauritius. “Also, the rationale for adopting the date of 30 August 2010 for grandfathering and making the panel’s decision non-appealable is difficult to understand,” says Garg. <br /> </div><div>According to sources, the Singapore treaty explicitly spells out that a person will be considered a Singapore resident and qualify for the treaty’s benefits if he can prove “substance” — expenditure and capital in the country above a certain limit. This is why most legitimate investors prefer the more secure Singapore route. <br /> </div><div>In Mauritius, to qualify for the benefits, all a person needs is a certificate of residence. “If you want to stop misuse of the Mauritius route, you can simply amend the treaty; you don’t need to introduce complicated GAAR rules for this,” says a senior revenue department official. <br /> </div><div>According to sources, strong lobbying by those who use (or misuse) the route — mostly unlisted companies — has so far prevented the Mauritius treaty from being amended. <br /> </div><div>The original GAAR would have forced many FIIs and investors to litigate if they were denied the benefits of the Mauritius treaty. Almost 70-80 per cent of FDI comes through Mauritius. Until 2006, most FII investment into India also came through Mauritius. <br /> </div><div>Tax officials, however, say that GAAR is necessary as there are several instances of companies or individuals trying to avoid paying tax by finding a structure that is legal but not acceptable. “The trigger for GAAR has to be what it is in most other countries and not what we had initially proposed,” says a revenue department source. Instead of applying Gaar “indiscriminately”, tax officials should isolate those who are clearly trying to launder money and avoid paying taxes. <br /> </div><div>While consultants and companies agree that avoidance rules are needed, they argue that these need to be carefully framed and specific. Satya Poddar, tax partner, E&Y, says, “GAAR is not meant to broaden the scope of the law; it is only meant to properly interpret and enforce the scope of the law. In most advanced countries, it is applied only as a last resort. Governments start with very explicit rules to ensure there is no tax avoidance — these are called SAAR (specific anti avoidance rules).” He says that the Indian tax laws do not clearly identify what is permissible and what is not, and, therefore, the gaps are misused.<br /><br /><span style="color: rgb(34, 34, 34); font-family: arial, sans-serif; font-size: 13px; line-height: normal;">(This story was published in Businessworld Issue Dated 28-01-2013)</span><br /><br /> </div>
