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GAAR, retrospective tax amendment keep revenue department busy in 2012
December, 27th 2012

Controversy generated by retrospective tax amendment to bring into net Vodafone-type deals and concerns over implementation of GAAR kept the Revenue Department busy throughout the year amid expectations that the government will resolve them in the coming year.

In a bid to restore the investor confidence the government roped in the services of tax expert Parthasarathy Shome whose two reports -- on GAAR and taxation of indirect transfer of assets -- is being considered by the Finance Ministry and some decisions are expected in the next Budget.

The controversy began with the then Finance Minister Pranab Mukherjee announcing in Budget 2012-13 to amend the Income Tax Act, 1961, with retrospective effect to undo the Supreme Court judgement in the Vodafone tax case.

The Income Tax department had slapped Rs 11,000 crore tax on Vodafone for its USD 11 billion acquisition of Hutchison Essar in 2007, a claim which was subsequently dismissed by the Supreme Court.

The apex court had ruled that Indian tax authorities did not have jurisdiction over the Vodafone-Hutchison deal, which was executed in Cayman Islands.

The Budget proposal to undo Supreme Court judgement evoked sharp reaction from international community. British Prime Minister Gordon Brown and US Treasury Secretary Timothy Geithner took up the issue with the government saying that such a move could deter investment sentiments.

Besides retrospective amendment, the General Anti Avoidance Rules (GAAR) proposal to check tax evasion dented investor confidence as the industry feared that GAAR rules would provide unbridled powers to tax officials.

Amid widespread concerns, Mukherjee, postponed the implementation of GAAR till April 2013.

The Finance Ministry initiated stakeholder consultation and even came out with a draft GAAR guidelines in July after Mukherjee became the President.

However, the GAAR draft by the Central Board of Direct Taxes (CBDT) did not find favour with Prime Minister Manmohan Singh, who was looking after the finance portfolio then. He had announced setting up of Shome panel to come up with fresh report after talking to stakeholders.

Besides, the Standing Committee on Finance in its report on the state of economy had found the investment climate in the country suffered a serious setback and investor confidence was hit mainly due to concerns over the impact of retrospective tax laws and GAAR.

Soon after P Chidambaram took charge of the Finance Ministry on August 1, he tried to soothe nerves of jittery investors and promised fine-tuning of policies and corrective measures to put in place a stable and non-adversarial tax regime.

"Clarity in tax laws, a stable tax regime, a non- adversarial tax administration, a fair mechanism for dispute resolution and an independent judiciary will provide great assurance to investors. We will take corrective measures wherever necessary," he had said.

The Shome Committee submitted its draft report on GAAR to Chidambaram on September 1 in which it recommended postponement of the controversial tax provision by three years till April 2016.

It said that the three year deferment would provide a window of opportunity to taxpayers to prepare themselves for the new regime and to the tax official to be trained for successful implementation.

As a step towards reassuring global investors, the Committee in its draft report suggested that GAAR provisions should not be invoked to examine the genuineness of the residency of entities in Mauritius.

Mauritius is the most preferred route for foreign investments because of the liberal taxation regime in the island country. India has a double taxation avoidance treaty with Mauritius.

The Committee has recommended that GARR be applicable only if the monetary threshold of tax benefit is Rs 3 crore and more.

Besides, the Shome Committee's draft report on indirect transfer of assets had favoured prospective application of tax law and waiver of interest and penalty in case of retrospective application.

The report on GAAR and retrospective amendment of the Shome Committee is under the consideration of Prime Minister's Office and the Finance Minister, respectively. Any changes in the proposed rules is likely to be announced in Budget 2013-14.

As the government fire-fights to achieve the budgeted direct and indirect tax collection target Rs 5.70 lakh crore and Rs 5.05 lakh crore, respectively, its finances remain under the pressure.

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