The Government had constituted an Expert Committee headed by Dr. Parthasarathi Shome on GAAR on July 13, 2012. The Committee has now submitted its draft report, which has been placed in public domain on September 1, 2012 for seeking suggestions/opinion of the various stakeholders.
The Government had earlier on August 6, 2012 also requested the Expert Committee to examine the applicability of the amendment on taxation of non-resident transfer of assets where the underlying asset is in India, in the context of Foreign Institutional Investors (FIIs) operating in India purely for portfolio investment. It has now been decided to expand the scope of the Terms of Reference of the Committee to include all non-resident tax payers instead of only FIIs.
India has comprehensive DTAA with 83 countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA, while Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a DTAA. Thus, India gives relief to both kind of taxpayers.
According to the tax treaty between India and Mauritius, capital gains can only be taxed in Mauritius, the same treaty exist with 16 other countries. But with only 3% of capital gains tax, the quality of its service and regulatory framework, its pool of professionals, geographical proximity, cultural affinities and long historical ties with India, Mauritius is the most attractive conduit for investments into India.
The DTAA has helped Mauritius in the development of its Financial Services sector and India has on the other hand benefitted in terms of foreign direct investments, which for the last ten years stand at a cumulative figure of around USD 55Billion, and also in terms of job creation.
According to various Indian press, the Double Taxation Avoidance Agreements are being misuse by investors to avoid paying taxes by routing investments through various countries which has tax treaty with India, in particular Mauritius and Singapore which account for 48% of FDI inflow to India
The Government had earlier on August 6, 2012 also requested the Expert Committee to examine the applicability of the amendment on taxation of non-resident transfer of assets where the underlying asset is in India, in the context of Foreign Institutional Investors (FIIs) operating in India purely for portfolio investment. It has now been decided to expand the scope of the Terms of Reference of the Committee to include all non-resident tax payers instead of only FIIs.
The terms of reference of the Committee are:
- Receive comments from stakeholders and the general public on the draft GAAR guidelines which have been published by the Government on its website.
- Vet and rework the guidelines based on this feedback and publish the second draft of the GAAR guidelines for comments and consultations.
- Undertake widespread consultations on the second draft GAAR guidelines.
- Finalise the GAAR guidelines and a roadmap for implementation and submit these to the government.
The Committee is mandated to work to the following time schedule:
- Receive comments from stakeholders and general public till end-July 2012.
- Vet and rework the guidelines based on this feedback and publish the second draft GAAR guidelines by 31 August 2012.
- Finalise the GAAR guidelines and a roadmap for implementation and submit these to the government by 30 September 2012.
GAAR
- The General Anti Avoidance Rule, or GAAR, was proposed in mid-March as part of the budget for fiscal 2013.
- GAAR aims to target tax evaders, partly by stopping Indian companies and investors from routing investments through Mauritius or other tax havens for the sole purpose of avoiding taxes.
- However, the ambiguous language, the lack of details, and the sudden onset of the provisions have been among the factors that have upset foreign investors.
- Finance Minister proposed to defer the rollout of GAAR by a year to the financial year that begins in April 2013 to “provide more time” to both taxpayers and the tax office “to address all related issues”.
- A local or foreign taxpayer will also be able to approach authorities in advance for a ruling on their potential tax liabilities, the Minister said.
- An independent member would be in the GAAR approving panel, while one member would be an officer of the level of Joint Secretary, or above, from the Ministry of Law.
- On the proposed retrospective amendment in tax rules, Mukherjee said the changes will not override the provisions of double-tax avoidance treaties India has with 82 countries.
- The retroactive changes will only impact those cases where a deal has been routed through low-tax and no-tax countries with whom India does not have tax treaties.
- The proposed retrospective changes in tax rules will not be used to reopen cases where assessment orders have already been finalized.
- Mukherjee proposed to reduce long-term capital gains tax on private equity firms on the sale of unlisted securities to 10 percent, from 20 per cent currently, and bring the tax rate in line with what is charged from foreign portfolio investors.
- The finance minister also proposed to cut the withholding tax to 5 per cent from 20 per cent currently on funding through foreign loans for “all businesses.” The budget in mid-March had proposed a lower withholding tax for some sectors.
- It is proposed to extend the tax exemption on long-term capital gains related to the sale of unlisted securities in an initial public offering. The levy of the Securities Transaction Tax would be levied at the rate of 0.2 per cent on the sales of unlisted securities.
Double Taxation Avoidance Agreement (DTAA)
India has comprehensive DTAA with 83 countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA, while Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a DTAA. Thus, India gives relief to both kind of taxpayers.
According to the tax treaty between India and Mauritius, capital gains can only be taxed in Mauritius, the same treaty exist with 16 other countries. But with only 3% of capital gains tax, the quality of its service and regulatory framework, its pool of professionals, geographical proximity, cultural affinities and long historical ties with India, Mauritius is the most attractive conduit for investments into India.
The DTAA has helped Mauritius in the development of its Financial Services sector and India has on the other hand benefitted in terms of foreign direct investments, which for the last ten years stand at a cumulative figure of around USD 55Billion, and also in terms of job creation.
According to various Indian press, the Double Taxation Avoidance Agreements are being misuse by investors to avoid paying taxes by routing investments through various countries which has tax treaty with India, in particular Mauritius and Singapore which account for 48% of FDI inflow to India
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