JOIN USPostpone GAAR by three years, says Shome panel
In a major boost to falling investments and investor sentiment in the India growth story, a committee set up by Prime Minister Manmohan Singh has suggested deferment of the controversial GAAR for three years and abolition of capital gains tax on transfer of securities, a practice adopted by many Western countries.
The draft report said: “GAAR should be deferred for 3 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 committee, headed by Parthasarathi Shome, has also recommended that GAAR be applicable only if the monetary threshold of tax benefit is Rs 3 crore or more.
The draft report, which was submitted to the Finance Ministry, has also sought comments from stakeholders by September 15.
“The government should abolish tax on gains arising from transfer of listed securities, whether in the nature of capital gains or business income, to both residents as well as non-residents. In order to make the proposal tax neutral, the government may consider to increase the rate of Securities Transaction Tax (STT) appropriately,” the committee said in its report.
Tax experts have welcomed the recommendation on capital gains tax on foreign institutional investors and non-resident Indians, saying it will ultimately help in growth of Indian economy, which has slowed down in the last few quarters because investments have been held back due to India’s rigid tax laws.
Capital gains are not taxed in the US and the UK, especially from non-residents, as it helps raise investment, which in turn helps growth.
The committee has also suggested that GAAR provisions should not be invoked to examine genuineness of the residency of entities in Mauritius, which has remained India’s top foreign direct investment source and the most preferred route for foreign investments. India has a liberal taxation regime called double taxation avoidance treaty with the island country.
The report further said that the government should retain the provisions of the Central Board of Direct Taxes (CBDT) circular, which was issued in 2000, on acceptance of Tax Residence Certificate (TRC) issued by the Mauritius. “If the government cannot accept it (proposal to abolish capital gains tax on transfer of listed securities) on political economy grounds, a second best alternative would be to retain...the circular accepting Tax Residence Certificate issued by the Mauritius authorities”, the report said. Earlier, CBDT had come out with draft guidelines on GAAR which did not find favour with Prime Minister Manmohan Singh, who was looking after the Finance portfolio. He had announced setting up of the Shome Committee to come up with a fresh report after talking to stakeholders.
India has been expressing concern over the misuse of Double Taxation Avoidance Agreement (DTAA) by foreign investors who route their investments through Mauritius to avoid tax liability. To minimise deficiency of trust between the tax administration and taxpayers, the committee suggested that a concerted training programme should be initiated in the areas of international taxation.
“A longer period of preparation should enable appropriate training… It would also enable taxpayers to plan for a change in the anti-avoidance regime that would allow legitimate tax planning reflecting a proper understanding of the new legislation and guidelines, while eschewing dubious tax avoidance arrangements,” the draft report said in support of its suggestions.