The Central Board of Direct Taxes (CBDT), Indias apex body for administration of taxes, has formed a six-member committee to draft guidelines for enforcing the general anti-avoidance rules (GAAR) introduced in the Union budget to crack down on tax cheats.
The panel, headed by CBDT chairman Laxman Das, is expected to submit the draft norms to the finance ministry within two months. The proposed guidelines will be put up for public feedback before they are finalized by the committee, which held a meeting early this week in New Delhi.
GAAR will help the tax authority deal with commercial transactions that are structured essentially to circumvent tax laws and avoid paying taxes. If the revenue authority concludes that a transaction by any entity is aimed primarily at avoiding taxes, it will be able to deny tax benefits claimed by the entity. The key challenge for the committee is to formulate the rules to determine whether the arrangement lacks commercial purpose or was made to obtain a tax benefit, said a revenue officer familiar with the development.
The new rules follow the Supreme Court ruling in January that the Vodafone Group Plcs $11.08 billion (around Rs. 56,400 crore today) transaction with Hutchison Whampoa Ltd that gained it entry into the Indian telecom market was outside the purview of the Indian tax law. The transaction was between Vodafones Netherlands subsidiary and Hutchisons Cayman Islands subsidiary.
In his ruling, Chief Justice S.H. Kapadia said: It is for the government of the day to have them (clear tax laws) incorporated in the treaties and laws so as to avoid conflicting views. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws.
The CBDT committee is currently studying the Australian tax practice statement that lists eight key factors such as the form and substance of an arrangement, time at which the arrangement was entered into, length of the period during which it was carried out and the change in the financial position of the taxpayer or a related entity due to the scheme, to determine whether a transaction has been entered into for the purpose of obtaining a tax benefit, said a second revenue official who spoke to Mint.
Both officials spoke on condition of anonymity.
The draft, according to this official, is still at a nascent stage, but will be similar to the Australian tax practice statement in identifying the purpose of any arrangement/transaction.
The rules will also provide a threshold of tax benefits above which GAAR can be invoked.
Experts believe the draft guidelines should curtail the unlimited powers sought to be given to an income-tax officer under GAAR and reduce the time frame for deciding a case.
The key challenges for the committee will be to restrict the unlimited discretion given to a tax officer, setting up an objective or quantitative criteria for invoking GAAR and shortening the time frame for deciding cases for effective implementation of GAAR, said Punit Shah, tax and regulatory partner at KPMG.
The committee, according to the second official cited above, is working on rules for the appointment and functions of members of the approving panel of GAAR. It is also discussing whether the anti-avoidance rules should apply retrospectively and is devising a method for the speedy disposal of cases.
Under GAAR, an assessing officer has the discretion to refer a case to the commissioner if he considers a transaction an impermissible tax avoidance arrangement. If the commissioner agrees with his stand, he can refer the case to a three-member approving panel of GAAR comprising income-tax commissioners for a final decision.
The proposal on introducing GAAR is on expected lines after the Supreme Court ruling in Vodafone case. However, we would need to see whether these rules would apply to prospective transactions only or retrospectively too, said Neeru Ahuja, partner at Deloitte Haskins and Sells.