The government of India plans to defer implementation of the General Anti Avoidance Rules (GAAR) until the time the tax administration is able to rebuild trust with companies on the controversial issue.
"Given the low level of confidence in tax authorities, investors fear that the provisions may result in harassment. The finance ministry is keen to avoid any dent in investor confidence at the moment and is looking at postponing the implementation for now," said a source. The view that has emerged in discussions so far is that it is best to defer implementation for now and not disturb the positive sentiment. The announcement is likely to be made in the 2015-16 Budget and could act as a major boost to investor confidence.
The Modi administration is working to revive growth and create jobs and getting the investment cycle back on track. It has taken a number of measures to ensure that tax policies are predictable and the revenue department projects a friendly image. The government wants to shore up the image of tax administration and regain investor confidence over the next few years before implementing GAAR, which is an internationally accepted norm.
Since assuming office, the NDA government has moved to repair the damage caused by the disruptive tax policies unleashed by the previous UPA regime. It has now urged the revenue department to adopt a non-adversarial attitude towards tax payers.
In recent moves, it has decided against appealing a high court verdict on transfer pricing cases involving Vodafone and Shell. This has been seen as a signal to investors that the NDA government is keen to ensure that tax policies are stable.
The government has also firmed up a framework for resolving transfer pricing cases, involving multinational companies from the US. GAAR rules, which are aimed at minimizing tax avoidance for investments made by entities based in tax havens, was set to kick in from April 1. It was introduced by then finance minister Pranab Mukherjee to curb tax avoidance in his 2012-13 Budget The rules scared investors and prompted the government to defer the implementation. The NDA government has said it is examining the issue.
GAAR is a set of broad principles-based rules within a country's tax code designed to counteract the perceived avoidance of tax, according to a document produced by tax consultancy Ernst & Young. GAAR is a concept within law that provides the taxing authority a mechanism to deny the tax benefits of transactions or arrangements believed not to have any commercial substance or purpose other than to generate the tax benefit(s) obtained, it says.