GAAR: Should you worry about the new tax-evasion rule?
January, 18th 2013
The government has accepted the Shome-Committee recommendations on General Anti-Avoidance Rules to clamp down on tax evasion. Since the issue has been making headlines recently, and will probably continue to, we've simplified it for you.
What is GAAR? The General Anti-Avoidance Rules (GAAR) were formulated under the Finance Act 2012, to be added to the Indian Income Tax Act. Their sole motive is to curb tax evasion. However, the GAAR guidelines chalked out by Central Board of Direct Taxes did not go down well with businesses in India and investors across the globe. As a result, an Expert Committee headed by Dr Parthasarathi Shome was set up to suggest recommendations. Most of these recommendations have been accepted by the government, albeit some with modifications. Here's what it means.
When will it be enforced? The government has deferred the applicability of GAAR to the financial year beginning April 1, 2015, instead of April 2013.
Will it impact you or your venture? If your company has been paying annual taxes of Rs 3 crore per annum or more, then the GAAR provisions will impact you, if the 'main purpose' of any of your business decisions, share sale/, salary details is to evade tax. So, review your plans in consultation with your chartered accountant. Also, stop receiving remuneration in your spouse's name, if that has been your means to avoid taxes. You may also need to review the registration of your business outside India to avoid taxes.
Can you contest the tax authority's claim? Yes, taxpayers will be allowed to prove that their business arrangement is not an Impermissible Avoidance Agreement (was not created to evade taxes).
Will your past investments too be liable under the Act? If you made investments before August 30, 2010 - when the Direct Taxes Code, Bill, 2010, was introduced - consider yourself lucky as your investments would be grandfathered from the GAAR provisions. Thus, when you redeem these investments, the resultant tax benefits will not fall under the GAAR purview.
Will companies/individuals investing in your venture too be impacted? If the investors in your company are non-resident investors who have invested in FIIs, then GAAR will not be applicable to them. If the FII investor in your company has decided not to obtain any benefit under the Tax Treaty and subjected themselves to the Act, then the GAAR provisions will not be applicable to them. The government is yet to clarify whether Participatory Notes too will be exempt.
Will you be given any intimation before the GAAR Provisions are invoked? The Taxman would have to issue a show cause notice to you. It would describe the reasons for invoking the provisions of GAAR.
Will tax adjustment be allowed in different years? While assessing the tax consequences of an impermissible avoidance arrangement, corresponding adjustments will be allowed under the same tax in the same as well as different years. But corresponding tax adjustment will not be allowed in the case of a different taxpayer.
Will you have to wait forever to assess your tax liability? The government has accepted the Committee's recommendation that an advance ruling may be obtained within 6 months for speedy disposal of applications. The government is looking at strengthening the Administration of Authority for Advance Ruling (AAR) to ensure that that an advance ruling may be obtained within the prescribed statutory time frame of six months.
Who exactly will look into tax-avoidance-related matters? The government has agreed to form a three-member panel as against the five-member panel suggested by the Expert Committee. A high court judge will head the panel, while the other two members will be a) a member of Indian Revenue Service of the rank or above the rank of Chief Commissioner of Income Tax; and b) an expert on direct taxes, international trade practices and business accounts. The directions issued by the Approving Panel shall be binding on the taxpayer as well as on the Income-Tax authorities, the government has indicated.