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A Work In Progress

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The General Anti Avoidance Rule (GAAR) was slated for introduction into the Indian tax laws through the Direct Tax Code (DTC) in 2009 with a view to combating tax avoidance. However, in view of the deferral of the introduction of DTC, the then Finance Minister chose to implement it through the Finance Act 2012. The proposed introduction of GAAR together with certain amendments made to the Income tax Act retrospectively to tax indirect transfers of shares met with wide spread criticism by the investing community, both in India and abroad.

These provisions lacked clarity and were controversial in nature. In order to undertake consultation and finalise the guidelines for GAAR implementation, an expert committee comprising Dr Parthasarathy Shome and three other members was constituted by the Government of India at the behest of the Prime Minister. Thereafter, the terms of reference to the Committee were expanded by bringing the retrospective amendments also within its consultative framework.

The Committee, based on the consultations as also on its own views in the matter, submitted its final report on 30th September 2012. The Finance Minister issued a statement in January 2013 accepting the major recommendations of the Expert Committee with some modifications. Considering the widespread criticism the stringent nature of GAAR attracted, the Government also made an announcement to postpone implementation to April 1, 2016 from April 1, 2014.

Some of the recommendations that were accepted and announced were that the provisions will trigger only if the arrangement results in a minimum tax benefit of Rs 3 crore to the assessee. Further, the main purpose of the arrangement should be to obtain tax benefit and the assesse will be given the opportunity to prove that the arrangement is not impermissible avoidance agreement. The Approving Panel would consist of independent members and will be chaired by a retired high court judge. One of the most welcome features is that investments made before August 30, 2010 will be grandfathered.

The Finance Bill 2013 introduced in the Parliament, has proposed to give effect to the major recommendations of the Expert Committee which is a welcome measure in diluting the GAAR provisions. It is hoped that this will also go a long way in providing safeguards to protect tax payers against arbitrary misuse of these provisions by tax officers. 

The retrospective amendments in regard to indirect transfers made last year led to apprehensions about the certainty and stability of the Indian tax laws especially because the Government was resorting to nullify a Supreme Court decision rendered in this regard. The Shome Committee concluded that retrospective application of tax law should be done only in the rarest of rare cases. There have been many issues which need clarification in regard to the coverage of the taxation of “indirect transfers” and the computation aspects which have impacted such deals.

The Finance Minister, however, is silent on the fate of these recommendations. 

The introduction of investment allowance on investments over Rs 100 crore in addition to depreciation is a welcome boost to investment growth. The tax credit of Rs 2000 to those tax payers whose total income is less than Rs 5 lakh is a marginal relief.  The budget proposes to levy a surcharge of 10 per cent on the income of individuals whose income is more than Rs 1 Crore . The other proposals are to increase the tax deduction from Royalty and fees for technical services from the current level of 10 to 25 per cent. However, if the Double Tax Treaty (DTT) provides a rate lower than 25 per cent for such payments, the deduction can be limited to the rate prescribed under the DTT.  

The buyback of shares are currently tax exempt in India if such shares in the Indian companies are held by holding companies in Mauritius, Cyprus or Singapore.  These transactions are brought under dividend distribution tax net at 20 per cent.  The concessional tax of 15 per cent on dividends of overseas subsidiaries will continue for one more year with the additional benefit of such dividend being exempted from dividend distribution tax if such amount is distributed as dividend by the holding company.

As regards the Direct Tax Code, the Finance Minister has indicated that work is still under progress.  It is not intended to be an amended version of the current Income-tax Act - rather it would be a new code based on international best practices that will be compatible with the needs of a fast developing economy.  It is welcome news that the modified DTC will be introduced in this session of the Parliament itself. Another positive feature in  the Finance Bill is the conscious decision not to bring in retrospective amendments even in cases where the interpretation of the current law by the Courts is not in accordance with the stand of the Revenue.

If one looks at the track record of the present Finance Minister, one would observe his penchant for introducing new taxes and his reluctance to drop them even if they were considered as not being business friendly. However, the present Finance Bill shows a more mature approach with the reversal of some provisions of GAAR and the amendments to the law being proposed with prospective effect. Further, a balance has been sought to be made between augmenting revenues and increasing taxes.

(By M Lakshminarayanan, Partner, Deloitte Haskins & Sells