MUMBAI: The Central Board of Direct Taxes (CBDT) has attempted to allay fears of investors, especially foreign investors, by holding that where the relevant tax treaty ‘sufficiently’ addresses the issue of tax avoidance then the General Anti Avoidance Provisions (GAAR) as contained in India’s domestic tax laws will not apply. Tax experts aver that an element of subjectivity continues.
Grandfathering from GAAR shall also be available in respect of investments made prior to April 1, 2017, including bonus on these shares or share split of original shares. Grandfathering (inapplicability of GAAR) will also be available to instruments which are later convertible, but as per terms finalised at the time of issue.
The concept of treaty override – where the beneficial tax provisions are ignored, was a cause of concern for foreign investors. GAAR is set to kick in from April 1.
CBDT in an exhaustive 16 point FAQ, released today has considered the suggestions of a working committee set up in June 2016, to look into investor’s concerns. Its circular explains that adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies. Thus, these are required to be tackled through domestic anti-avoidance rules such as GAAR. “However, if a case of avoidance is sufficiently addressed by a Limitation of Benefit (LOB) clause in the tax treaty, there shall not be an occasion to invoke GAAR”.
“There is still room for subjectivity in interpretation by the I-T authorities. CBDT could have explicitly clarified that GAAR will not apply where the conditions in specific anti avoidance regulations (SAAR) such as LOB clauses in the tax treaty have been met. Instead one of the FAQs also states that the provisions of GAAR and SAAR can co-exist,” says Punit Shah, partner, Dhruva Advisors.
The Shome Committee had earlier recommended that GAAR should not apply to ta tax treaty which has specific LOB clauses. For instance, the LOB clause in the revised tax treaty with Mauritius provides that a Mauritius investor will not be entitled to tax treaty benefits if the primary objective is to claim tax benefit. Second, it adds that shell companies will also not be entitled to the benefit of a lower tax on capital gains during the transition period of two years commencing from April 1. A shell company is one whose total expenditure on operations in Mauritius is less than Rs. 27 lakh in the previous 12 months.
Sudhir Kapadia, national tax head at EY India adds: “It would have been useful if specific tax treaties were cited where LOB fulfilment would be adequate for inapplicability of GAAR.”
There is some good news for offshore funds and portfolio investors as the FAQ explains that GAAR shall not be involved merely because an entity is located in a tax efficient jurisdiction. If the choice of the jurisdiction is based on non-tax commercial considerations, GAAR will not apply.
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“The right of a taxpayer to choose a particular method of transaction has been protected from the applicability of GAAR. For eg: these provisions will not come in the way of the taxpayer’s choice of financing by way of debt vis-a-vis equity or in the form of business structure – say company vis-a-vis a limited liability partnership,” explains Kapadia.
“While clarification has been provided for grandfathering of investments made prior to April 1, 2017, including bonus or splits, a lacunae remains. Strangely acquisition of shares in mergers and demergers are not grandfathered, even if the original shares were acquired prior to this date,” says Girish Vanvari, national head of tax at KPMG India.