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Govt Defers GAAR to Lure Foreign Investors

In a bid to lure foreign investors back to the Indian market,the government on Monday deferred the implementation of the controversial general anti-avoidance rules (GAAR) by two years and built in safeguards to check against possible misuse by tax authorities.
The biggest safeguard is that GAAR will be invoked only in case of deals where the main purpose is to obtain tax benefit.And even in such cases,tax department officials will be required to first issue showcause notices containing reasons using the provisions incorporated into the law in the last budget.

Sensex soars to a two-year high

The decision to defer GAAR to 2016 and hopes of a rate cut following a decline in inflation saw the sensex,led by tech and banking stocks,gaining 243 points to close at a two- year high of 19,906.The NSE too shot up 73 points.P 21

I-T dept will have option to open cases post Aug 2010

New Delhi:Even as GAAR will be invoked very selectively and I-T department will have to send notices to the assessees,but the onus will be on assessees who receive the notice to prove that the tax arrangement is not impermissible.
An additional safety valve has also been inserted through an independent approving panel,headed by a retired high court judge,with an external expert and a senior tax department officer as members.Earlier,the committee was to consist of only government officials.
What it does is remove the uncertainty around GAAR.Investors dont like uncertainty and since it is applicable from April 2016,it gives time for investors and the tax department to be better prepared, said Pratik Gupta,head,equities,Deutsche Equities India,among the largest FII brokerages in the country.
For foreign investors,the biggest gain is that non-residents investing via FIIs dont have to worry.It will,however,apply to FIIs that take advantage of benefits under tax treaties that India has with countries such as Mauritius and Singapore.But tax experts warned that the fine print needs to be looked at,given the recommendations of the committee headed by Parthasarthi Shome which was appointed to provide clarity in the issue.
Particularly for FIIs,there is clearly a window for them to become compliant;after the implementation of GAAR,if they are not compliant,they would end up paying taxes, Rahul Garg,direct tax practice leader at consulting firm PricewaterhouseCoopers India,said.
But there are some concerns over the fact that the tax authorities will have the option to open cases after August 30,2010,though GAAR will kick in from April 2016.But it will only be invoked in case of tax avoidance, said finance minister P Chidambaram,who will now seek amendments to the law.
While FIIs and private equity players are unlikely to be affected,foreign direct investment may continue to face scrutiny since September 2010,tax experts said.
But the finance minister sought to sell the amendments as win-win for investors as well as tax authorities.The modifications that we have done are fair,non-discriminatory,just and strike a balance between the interest of the revenue department and that of investors, he said.
One would need to see the detailed report that has been accepted to ascertain whether certain types of transactions would be exempted from application of GAAR by virtue of the tax exemption provided within the tax laws upon satisfaction of conditions, said Daksha Baxi,executive director at Khaitan & Co,a tax consultant.The changes have been undertaken after a series of protests over the GAAR rules by foreign investors.Even the draft rules released failed to comfort them,prompting PM Manmohan Singh to appoint the Shome committee to review the norms.

Times View

The government has moved in the right direction by putting in place safeguards to check against misuse of the GAAR provisions by tax authorities.Besides,by deferring the implementation by another two years,the finance ministry has given time to investors as well its officials to prepare for the new regime.One of the most critical elements of a friendly tax regime is to have a low rate of tax and clarity in administration.By following this path,the government will ensure that there is less incentive for companies and individuals to evade taxes,which is always the best method of ensuring tax compliance.

Times of India, New Delhi, 15-01-2013

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