After recommending deferment of the prickly General Anti Avoidance Rules (GAAR) by three years, Parthasarathi Shome, the head of an expert committee set up by Prime Minister Manmohan Singh to address concerns of foreign investors, said abolishing capital gains tax on the transfer of securities is the right step.
India has to be competitive in attracting investment to reverse sluggish growth, and needs inflows to balance its capital account, Mr Shome told NDTV in an interview.
"...GAAR should be deferred for three years. But the year, 2016-17 should be announced now. In effect, therefore, GAAR would apply from assessment year 2017-18. Pre-announcement is a common practice internationally, in today's global environment of freely flowing capital," the draft noted.
In an attempt to reassure chary global investors about the country’s regulatory environment, the Committee has suggested that GAAR provisions should not be invoked to examine the genuineness of residency of entities in Mauritius.
Mauritius is the most preferred route for foreign investments because of the liberal taxation regime in the island country, and has a Double Taxation Avoidance Agreement (DTAA) with India.
Mr Shome said there is nothing wrong with the tax treaty with Mauritius and a Limitation of Benefits (LoB) clause in the treaty is not required.
Since the GAAR proposals were first tabled in Parliament, Mauritius authorities have been saying that while they will cooperate with the Indian government to check tax evasion, the GAAR provisions should not overrule their bilateral treaty.
Striking a positive note for foreign investors, Mr Shome said India needs to honour its tax treaties, and cannot suddenly say, “This is not enough.”
The Committee has also recommended that the tax provisions be applicable only if the monetary threshold of the tax benefit is Rs 3 crore or more.
The draft report, which was submitted to the Finance Ministry yesterday, has also sought comments from stakeholders by September 15.
The scope of the terms of reference of the committee has been expanded to include all non-resident tax payers instead of only foreign institutional investors.
The government earlier postponed implementing GAAR, which was introduced by the-then Finance Minister Pranab Mukherjee in the Union Budget for 2012-13.
On circular 789, which relates to tax residency certificate, he said abolishing the circular will cause “tremendous” uncertainty, and it is wrong to revoke an agreement signed in 2000. Under the rule, tax authorities have to accept a tax residency certificate issued by Mauritius revenue officials, thereby entitling the holder of the certificate to be exempt from having to pay capital gains tax.
Calling for better tax administration on GAAR, Mr Shome said tax administrators are not prepared for the provisions, and investors as well as auditors also need to be ready for GAAR.
The panel is currently examining indirect transfer of assets and looking at which structures should be taxed, Mr Shome said, but avoided any direct reference to the 2007 deal between telecom majors Hutchison and Vodafone.
The panel has proposed increasing the securities transaction tax (STT) to compensate for the revenue loss from abolishing the capital gains tax, which he said is “highly distortionary”.
Mr Shome said the committee had discussed the issues with the Finance Minister before finalizing the recommendations.
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