Defer GAAR by three years, suggests Shome Committee (Lead)

September 1st, 2012 - 9:03 pm ICT by IANS  

Manmohan Singh New Delhi, Sep 1 (IANS) An expert committee on tax laws Saturday suggested that the Indian government defer implementation of the controversial General Anti-Avoidance Rules (GAAR) until fiscal 2016-17 and abolish capital gains tax on transfer of securities to ensure investment and capital flows.

The committee, appointed by Prime Minister Manmohan Singh in July when he was holding the finance portfolio, in its draft report to the finance ministry recommended a series of steps which are expected to allay investor concerns.

“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,” said the draft report.

The government had earlier deferred implementation of GAAR, introduced by the then Finance Minister Pranab Mukherjee in his 2012-13 budget to check tax evasion.

The committee, headed by Parthasarathi Shome, called GAAR “an extremely advanced instrument of tax administration-one of deterrence, rather than for revenue generation” for which, it said, intensive training of tax officers who would specialize in the finer aspects of international taxation is needed.

It recommended a grandfathering clause to protect existing investments and providing protection for transactions routed through Mauritius with which India has a double taxation avoidance treaty and is considered a tax haven.

To protect existing investments, it said: “All investments (though not arrangements) made by a resident or non-resident and existing as on the date of commencement of the GAAR provisions should not be taxed as per GAAR provisions.”

The panel made a case for abolition of capital gain tax to attract investment.

“Internationally, many countries have stopped taxing capital gains because you want investment, and investment and capital flows are very fungible. If you are looking for investment like in our case, it is very important to do that,” Shome told a television channel.

“So, I have suggested in the committee and everyone has agreed is that we need to look for what is going to rejuvenate our investment. From that investment there will be growth, employment and other things, which we have lost in the past two years or so.”

The Finance Ministry also Saturday expanded the scope of the terms of reference of the committee to include all non-resident tax payers instead of only FIIs.

“The draft report has recommended certain amendments in the Income-tax Act, 1961; guidelines to be prescribed under the Income-tax Rules, 1962; circular to clarify GAAR provisions along with illustrations; and other measures to improve tax administration specifically oriented towards GAAR matters,” said a finance ministry release.

“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,” it said.

The committee invited comments on the draft recommendations from all stakeholders by Sep 15.

It will submit its final report by the month-end.

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