The finance ministry might dilute the Budgets income tax provisions with regard to retrospective taxation and General Anti Avoidance Rules (GAAR) but is not likely to tow the line of the Parthasarathi Shome panel.

The panel gave its final report on Wednesday on retrospective taxation, recommending foreign companies going for mergers & acquisitions in India should pay tax only prospectively.

The Central Board of Direct Taxes (CBDT) is of the view there could be some practical difficulties in fully accepting the Shome recommendations on both retrospective taxation and GAAR. It is trying to find a middle path so that investors concerns are addressed without compromising significantly on the tax revenue to the government in a difficult year. A decision will be taken by Finance Minister P Chidambaram.

THE HURDLES
CBDT is of the view there could be some practical difficulties in fully accepting the recommendations on both retrospective taxation and GAAR
 
CBDT might look at scrapping the validation clause and change some definitions in the I-T Act or GAAR to remove any unintended consequences
 
For GAAR, the panel recommended postponing it by three years to April 2016, but the I-T dept says this is too long and the deferral could be for one to two year
Some of the recommendations of the Shome panel are not doable. Retrospective amendments are not something new. Maybe some of the current provisions of the Income Tax Act are too harsh and we will try to address those issues, said a finance ministry official who didnt want to be identified.

Officials said the CBDT might look at scrapping the validation clause and change some definitions in the I-T Act or GAAR to remove any unintended consequences. However, if indirect transfers are taxed only prospectively, it faced the challenge of giving refunds to all those companies which had already paid tax.

The ministry was expecting Rs 35,000 crore to Rs 40,000 crore by way of retrospective tax on indirect transfer of Indian assets by non-residents. If the validation clause is removed, a large part of this will not come to it.

Vodafone, which had the Supreme Court ruling in its favour, might not have to fear a tax notice demanding Rs 8,000 crore on its 2007 deal with Hutchison.

The Shome panel had said if there was retrospective levy, the tax should be collected from the seller and the interest and penalty waived. This will also save Vodafone but the tax department might face many administrative and legal challenges in collecting tax from Hutchison, the seller in this case.

This is so because Hutchison does not have operations in India now.

Similarly for GAAR, the panel had recommended postponing it by three years to April 2016 but the department says this is too long and the deferral could be for one to two years (April 2014 or April 2015).

The ministry is likely to soon announce the GAAR guidelines on the circumstances in which the rules would be invoked but deferment would happen only after taking approval of Parliament. The Finance Act, 2012, had specified April 1, 2013, for introduction of GAAR.

Officials said the rules might be invoked only when the main purpose (and not one of the main purposes as suggested in the draft rules) of the entity under the scanner seems to be to avoid tax. Barring the timeframe, most other recommendations of the Shome panel with regard to GAAR are also likely to be accepted.