Govt may dilute GAAR proposals, target tax havens

The finance ministry may dilute some provisions of the proposed General Anti-Avoidance Rule (GAAR) to allay investors’ fears about excessive powers to the taxman under the regime. The rules may be worded in a manner that the onus to prove tax avoidance is also on the tax officials and not only on the taxpayer as proposed in the Budget. The ministry may also consider suggestions to include people other than income tax department officials in the approving panel, which will assess whether GAAR will be invoked or not.

GAAR, along with retrospective amendments of the Income Tax Act, has created a scare among the industry on the ground that these proposals might hurt investor sentiment. GAAR would be invoked if a deal’s purpose is proved to be avoidance of tax. However, other provisions of GAAR with regard to taxation of investors routing investments through tax havens may not be relaxed. The finance ministry is firm that any investment through a low-tax or no tax jurisdiction, like Mauritius, made by an investor from another country mainly to obtain tax benefit, would not be spared by the tax department. Thus, proposals to include all kinds of foreign investments, including portfolio investments, and treaty overriding provisions may remain.

“Even now, the onus is not entirely on the taxpayer. Tax officials also have to prove it but the proof can only come from the investor. However, if there are any apprehensions, we can try making it clearer in the rules. There will be adequate safeguards to ensure that genuine investors are protected,” said a finance ministry official, who requested anonymity. Currently, GAAR proposals say it would be presumed that obtaining tax benefit is the main purpose of an Retrospective changes: FM refuses to budge in US

A list of the proposals and how they stand:

Rules will not be specific to any country or asset class; will be applicable to all foreign portfolio investment

Govt will not go after P-note holders but if an FII is taxed, the post-tax profit of the P-note holder will come down

Onus to prove whether it’s a case of tax avoidance or not will be on the tax department and the taxpayer

Rules will not tax transactions retrospectively; will come into effect from assessment year 2013-14

Treaty-overriding provisions to stay, to affect ‘fly-by-night’ investors coming via tax havens

Approving panel deciding on tax avoidance may comprise independent people other than tax officers

Taxman, not just taxpayer, must prove avoidance or otherwise; non-tax officials also on deciding panel

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