Thursday, April 26, 2012

>STRATEGY: No escaping GAAR.

No escaping GAAR. The Government issued certain clarifications on GAAR and clarified that GAAR would apply on all impermissible arrangements from April 1, 2012. However, GAAR provisions will not apply with retrospective effect. The Government’s clarifications effectively extinguish hopes of postponement of GAAR provisions or implementation of a ‘sunset’ process to allow sufficient time for affected entities to deploy alternatives.

GAAR will apply to all impermissible structures
The Revenue Secretary categorically stated that GAAR would apply to all ‘impermissible arrangements’. As part of the clarification on ‘impermissible arrangements’ in the context of foreign institutional investors (FIIs), he stated that an arrangement would be deemed impermissible if it did not have a reasonable operation in a country (and where it does not have to pay tax) and the actual operations, such as fund management and trading, are done from some other country.

GAAR will apply from April 1, 2012; no retrospective application
The Government clarified that the provisions of GAAR would apply from April 1, 2012. However, it would not apply with retrospective effect. Besides, GAAR would not be invoked if the entities pay short-term capital gains tax or income tax, as the case may be, in India. The Government will put in place sufficient safeguards to ensure that GAAR provisions are not applied haphazardly. In terms of procedural issues for taxing an entity under GAAR, the IT department will have to prove that (1) an arrangement is impermissible for it to invoke GAAR provisions and (2) the arrangement has been made for the sole purpose of avoiding taxes.

GAAR would apply to P-Note providing FIIs if the structure is deemed impermissible
On the specific issue of P-Note providing FIIs, the Revenue Secretary clarified that GAAR applied to investors investing in India and an FII would be liable for tax under GAAR if the arrangement were not permissible. The Government clarified that GAAR would apply to all investors (foreign or resident) and it is not directed at any country or investor.