GAAR introduced: Budget 2012 proposes to introduce comprehensive GAAR provisions providing wide powers to the revenue authorities

in taxing impermissible avoidance arrangements including the power to disregard entities in a structure, reallocate income and expenditure between parties to the arrangement, alter the tax residence of such entities and the legal sites of assets involved, treat debt as equity and vice versa, and the like. For a detailed analysis please see our hotline on Budget 2012 (India Budget Insights (2012 - 13) Analysis: Given the 3 year lock-in for FDI in real estate; exits by foreign investors in some cases is structured by way of sale of the offshore company holding investments in the Indian real estate company. However, with the new GAAR provisions coming into force, it may be possible for tax department to take a view in such cases that the transfer at the holding company level is carried out to avoid tax in India and hence the treaty benefits for such transfer should not be granted. Presently, in case of transfer of shares of a company holding immovable property, long term capital gains benefit could be availed upon sale of shares of the Indian company provided the period of holding of such shares exceeded 12 months. However, applying GAAR, revenue may be able to re-characterize the nature of the transaction and declare that the real intent of the parties was to transfer immovable property and hence the period of holding to avail long term capital gains tax benefit should be a period of 36 months. As per existing section 2(47)(vi) of the Income Tax Act (ITA), any transfer of shares of company which have the effect of transferring any immovable property is captured within the purview of the term transfer. Transactions involving transfer of an immovable property in India, irrespective of the transacting parties being non-resident may now become taxable as immovable property under GAAR coupled with existing section 2(47)(vi). Revenue authorities may deny tax benefits even if conferred under a tax treaty. Wide discretionary powers provided to the revenue authorities give much room for misuse and will increase litigation in the country. The GAAR provisions are likely to capture most of the structures for investments into India, especially since tax mitigation is always a key consideration. GAAR can give rise to double taxation in cases where taxpayers are denied treaty benefits on the basis of the subjective interpretation of the facts under the GAAR provisions. Investors may also be denied the benefit of advance rulings on GAAR matters due to limitations in the current statutory provisions.

9.

Obligation to withhold tax: Budget 2012 seeks to include an explanation to extend the application of withholding tax on payments to non-residents, to all persons, resident or non-resident, whether or not the nonresident has a residence or place of business or business connection in India; or any other

presence in any manner whatsoever in India. For analysis of withholding royalty (relevant for hospitality sector), please see our hotline on Budget 2012 (India Budget Insights (2012 -13). Analysis: Exits by offshore realty funds were structured by way of transfer of shares of the offshore holding company as shares of real estate companies were locked-in for 3 years for investments. Such offshore transfers may now be taxable in India.

10.

Eligibility to claim treaty benefits: The Budget proposals give rise to onerous compliance challenges for foreign investors. For claiming treaty benefits, non-resident taxpayers will be required to obtain a tax residency certificate containing specific particulars as may be prescribed by the Revenue. Analysis: Not every country may issue a TRC and this may result in the denial of treaty benefits due to procedural issues. The impact of this along with the GAAR provisions may result in protracted litigation with the revenue authorities on any matter relating to treaty benefit.

11.

Withholding on Immovable Property: Further, withholding of tax on transfer of immovable property (other than agricultural land) is proposed to be imposed wherein every transferee, at the time of making payments or crediting the consideration for transfer of immovable property, shall deduct tax at the rate of 1% of such 4 sum, subject to de-minims principles. Analysis: The proposal is bound to increase compliance and administrative obligations of buyers of immovable property. For instance buyers would now be required to obtain a tax deduction account number and deposit the tax deducted with the revenue. Since the obligation to withhold tax is casted on all persons, such obligations would extend to individuals as well.

12.

Reopening past cases: Budget 2012 also increases the time period for taxing prior transactions from 6 years to 16 years, making it extremely difficult for taxpayers to maintain necessary documentation and manage litigation risks. Further, the provision contains a carve out which does not make the limitation period applicable to income which has escaped assessment including income in relation to any asset (including financial interest) in any entity located outside India. Analysis:

This could potentially result in such incomes not having a limitation period applicable at all. The proposal would prompt more players in the market to obtain tax insurance for their affairs, availability of which is already a challenge.

General Anti Avoidance Rules (GAAR) IndiaWikiImplications

GAAR Abbreviation
GAAR abbreviation stands for general-anti-avoidance rules and it has been introduced in India due to VODAFONE case ruling in favour of this company by the Supreme Court. The new rules will come into effect from 01 April, 2012.

GAAR Implications in India

Indian Government is trying to give powers to income tax authorities as implementation of GAAR provides tremendous powers to deny tax benefit to an entity if a transaction has been carried with the sole intention of tax avoidance. Due to powers in the hand of taxmen, now innocents may be harassed by them. FII & FDI money coming to India through Mauritius route will now become taxable. Increased litigations.

GAAR Worst Scenario

The onus lies on the assesse to prove that there is no tax benefit and the transaction is not an avoidance transaction.

GAAR Example
To make it easier to understand GAAR; we can say that suppose a person or a company is setting up business in Gulf Country and its clear intention is to claim exemption from capital gains tax, in such a scenario Indian govt has the right to deny the legitimate claim for exemption provided under DTAA as it falls under tax avoidance and Indian govt is trying to plug the loopholes. Check us out daily for sure tip and make money with our free Nifty tips for trading at NSE.

general anti avoidance rule india , general anti avoidance rule gaar, general anti avoidance legislation, gaar provisions of dtc

So what is this GAAR and why is it so important for the markets? GAAR is a taxation regulation that will make investors pay tax who otherwise legally avoid it. It must be kept in mind that legal evasion of tax is not the same as avoidance of tax.

P-notes are instruments used by investors abroad to invest in Indian securities indirectly. Reuters That GAAR will be introduced in India as a part of the Direct Tax Code was mentioned by the finance minister a year back. But this years budget made it clear it will be applicable from 1 April. So under GAAR, the revenue authorities will get to tax transactions or arrangements which were conducted or set up just to get tax benefits. So routing transactions through Mauritius when there is no substantial purpose to route it from there other than achieving the tax benefit will not be allowed. The issue of P-notes is crucial. P-notes are financial instruments used by investors or hedge funds that are not registered with Sebi to invest in Indian securities. The investor does not have to fulfill KYC (Know Your Client) norms here and gets to invest whatever amount he wants by keeping his own identity hidden. There is confusion in the market whether the gains from these instruments will also be taxed. Now, with the finance ministrys statement, there could be temporary relief, but FIIs might not be wholly convinced. Sections 9 and 95 of the new Finance Bill (under which GAAR was introduced) says clearly that any transfer of shares in India which gives rise to income anywhere else will be taxable here. These sections will clearly have to be amended if cash investments of P-notes routed through tax havens like Mauritius will have to be exempted from tax. According to an Edelweiss note, P notes will be facing indirect taxes only. Direct taxation is not possible if the note or the contract is carefully worded because shares or voting rights are not transferred through these. The nature of transaction is a contract and does not transfer share or interest, that Section 9 talks about. Taxes will also be applicable to indirect transfer, which alludes to the recent Vodafone case where the Supreme Court, much to the shock of tax authorities in India, had ruled against levying tax on transactions fully carried out abroad. The main contradiction in Section 9, therefore, lies with the retrospective effect of the tax which might go back even to 50 years (1962 to be precise, when Indias existing tax code got enacted). This would retrospectively tax all cross-border deals the government might fix upon and gives a wrong signal to foreign investors.

In case of companies routing investments through Mauritius, under the new law, the onus lies on the taxpayer to prove that the transaction or the arrangement of any transaction did not have tax benefit as the main purpose. It might be difficult for most Indian corporate entities to prove they have any other sound reasons for having an establishment in Mauritius. PwC, in a recent note explains, The scope of the Indian GAAR is very wide as it seeks to cover within its ambit nearly all the arrangements (the term arrangement is very widely defined to cover almost every transaction, scheme, understanding, etc.) and therefore could be difficult to favour the taxpayer in any way. Once GAAR is invoked, a commissioner of income tax (CIT) has been entrusted with enormous powers to settle the issue and revoke tax benefits which might have gone to the taxpayer. In such a situation, there are options to move establishments to countries like Singapore, though that also includes additional costs. P-note issuers like CLSA have halted issuing such instruments for now till there is more clarity on the issue. They have made it clear that taxes will be passed on to clients who are ultimate gainers of the transaction. However, they say, there is no need for panic selling if one is fundamentally bullish on India. But it is definitely easier for companies like CLSA to shift clients from Mauritius to say, Singapore, where they already have a formidable base. But entities who will not be able to justify a base in Mauritius for reasons other than tax planning will be in deep trouble. There could be immediate volatility in the market mainly in futures and options section, but ultimately investors might just begin to price in a tax cost when they invest in India.

Indias new General Anti-Avoidance Rules (GAAR) kicked in from April 1, and it looks like they will have an immediate impact on the use of Mauritius as a tax haven for investing in India.

Introduced as part of the 2012 Finance Bill, the GAAR provisions objective is to insist upon the principal of substance over form, meaning the real intention of the parties involved and the purpose of establishing an arrangement are taken into account for determining the tax consequences, irrespective of the legal structure of the transaction or arrangement. This immediately impacts upon Mauritius, which has been the single largest investor into India for much of the last 15 years.

The reason for this is the Mauritius-India tax treaty, which allows for tax exemption in capital gains. As a result, much of the Mauritian investment into India is actually round tripping by Indian companies setting up a Mauritian entity to avoid CGT in India. The GAAR rules however are being interpreted as suggesting that investors into India using the

Mauritius route will now be subject to CGT unless they can demonstrate a substantial commercial presence in Mauritius.

This is currently under review, with representations being made to the government from a variety of major financial investors in India, including Goldman Sachs, JP Morgan, Morgan Stanley and so on. Clarification will be issued once the Finance Bill is passed, but for now investors would be wise to note that the Mauritius route for investing into India may be about to be trimmed down in tax value terms.

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