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Budget 2010 to put in place anti-avoidance rules for tax
December, 30th 2009

The forthcoming Union budget may have an anti-avoidance provision, which can effectively check convoluted transactions devised exclusively for the purpose of evading paying taxes in India.

The finance ministry, said revenue department officials, is contemplating the idea of vesting powers with the commissioners of Income-tax (I-T) to declare a transaction a sham, if there is a reason to believe that its purpose is to avoid tax in this country.

Incorporation of such a law into the countrys I-T Act has been a long standing demand of the tax authorities who often find themselves handicapped whenever they come across a transaction of this nature.

Most develped countries have put in place anti-tax avoidance laws that focus on effectively checking tax efficient transaction structures adopted by tax payers to pay less or no tax in their respective jurisdiction.

The I-T Act 1961, which is the existing tax code, does not have provisions that can effectively check such an exercise. Common examples of transactions that are convoluted are when there is a shell company registered in Mauritius or another country with low tax rates, which ensures the tax payer can avoid paying tax in India.

However, at present, the only recourse available to the I-T authorities is to cite the Supreme Court decision in the McDowell Vs Commercial Tax Officer case (1985) that held that such transactions should be analysed thoroughly and taxed accordingly if the intention behind undertaking the transaction was to evade/avoid taxes.

The Direct Tax Code (DTC), the new tax code proposed to be replacing the existing I-T Act, also contains provisions for anti-avoidance.

The DTC empowers the commissioners to declare a transaction as an impermissible arrangement to avoid paying taxes in India. A part or even the complete transaction can be declared impermissible or lacking in business substance.

What is not clear is when the DTC would be made into a law. Since the DTC contains several sensitive and controversial tax proposals, it would require several rounds of discussions before it is law. The government, it is gathered, may incorporate some of the proposals made in the DTC to the existing I-T Act in the budget proposal.

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