After recommending deferment of the prickly General Anti Avoidance
Rules (GAAR) by three years, Parthasarathi Shome, the head of an expert
committee set up by Prime Minister Manmohan Singh to address concerns of
foreign investors, said abolishing capital gains tax on the transfer of
securities is the right step.
India has to be competitive in attracting investment to reverse
sluggish growth, and needs inflows to balance its capital account, Mr
Shome told NDTV in an interview.
"...GAAR should be deferred for three years. But the year, 2016-17
should be announced now. In effect, therefore, GAAR would apply from
assessment year 2017-18. Pre-announcement is a common practice
internationally, in today's global environment of freely flowing
capital," the draft noted.
In an attempt to reassure chary global investors about the country’s
regulatory environment, the Committee has suggested that GAAR provisions
should not be invoked to examine the genuineness of residency of
entities in Mauritius.
Mauritius is the most preferred route for foreign investments because
of the liberal taxation regime in the island country, and has a Double
Taxation Avoidance Agreement (DTAA) with India.
Mr Shome said there is nothing wrong with the tax treaty with Mauritius
and a Limitation of Benefits (LoB) clause in the treaty is not
required.
Since the GAAR proposals were first tabled in Parliament, Mauritius
authorities have been saying that while they will cooperate with the
Indian government to check tax evasion, the GAAR provisions should not
overrule their bilateral treaty.
Striking a positive note for foreign investors, Mr Shome said India
needs to honour its tax treaties, and cannot suddenly say, “This is not
enough.”
The Committee has also recommended that the tax provisions be applicable only if the monetary threshold of the tax benefit is Rs. 3 crore or more.
The draft report, which was submitted to the Finance Ministry
yesterday, has also sought comments from stakeholders by September 15.
The scope of the terms of reference of the committee has been expanded
to include all non-resident tax payers instead of only foreign
institutional investors.
The government earlier postponed implementing GAAR, which was
introduced by the-then Finance Minister Pranab Mukherjee in the Union
Budget for 2012-13.
On circular 789, which relates to tax residency certificate, he said
abolishing the circular will cause “tremendous” uncertainty, and it is
wrong to revoke an agreement signed in 2000. Under the rule, tax
authorities have to accept a tax residency certificate issued by
Mauritius revenue officials, thereby entitling the holder of the
certificate to be exempt from having to pay capital gains tax.
Calling for better tax administration on GAAR, Mr Shome said tax
administrators are not prepared for the provisions, and investors as
well as auditors also need to be ready for GAAR.
The panel is currently examining indirect transfer of assets and
looking at which structures should be taxed, Mr Shome said, but avoided
any direct reference to the 2007 deal between telecom majors Hutchison
and Vodafone.
The panel has proposed increasing the securities transaction tax (STT)
to compensate for the revenue loss from abolishing the capital gains
tax, which he said is “highly distortionary”.
Mr Shome said the committee had discussed the issues with the Finance Minister before finalizing the recommendations.
