‘Pushing back GAAR has sound reason’

The taxman has taken a headlong plunge into an alphabetic soup to comply/align with emerging tax and jurisdictional requirements, domestic and foreign, of which is GST is only one.

Advance Pricing Agreements (APAs); General Anti-Avoidance Rules (GAAR); BEPS (Base Erosion and Profit Sharing); and POEM (Place of Effective Management) are some of the other ingredients in churn.

The stress now should be on implementation of the budget proposals, says Venkatesan R, Partner, BSR and Co. “The budget box appears to be large. If we open it, it is largely hollow except stray actionable proposals.”

Of these, BEPS is the latest whose basic idea is to shift profits across borders to take advantage of tax rates that are lower than in the country where the profit is made.

“People have been trying to shift profits to other jurisdictions. The idea is to bring back the profits to where the economic activity and substance lie. This is high on the agenda of the OECD but is still a work in progress.”

GAAR is sought to be aligned with this, Venkatesan said. And this should be the reason why the Finance Minister has pushed it back by two years.

The US, the UK and even China are all trying to bring new laws on indirect transfers to prevent profits being taken out to foreign shores.

No wonder, a decision has been made to the effect that GAAR will be prospective and shall align with BEPS.

There is a significant statement with respect to POEM, Venkatesan said. Shell companies based abroad would have to pay taxes on their global income for a year if their place of effective management is India ‘even for a day.’

POEM was an agenda in the Direct Tax Code but it said that it would be triggered when the management would be ‘only in India.’ This has now been changed to ‘anytime in India.’

“So even if you have a board meeting here, or a decision is taken here, POEM will be triggered. And your overseas company which is being controlled from India will pay tax on profits in India.”

So companies with a presence abroad need to have a strategy on how control and management is kept outside of India, Venkatesan said.

He recalled that the new government had brought out its first budget took at a time when the Indian economy was in recession.

The main agenda was to reboot India. Having rebooted, the aim of the current exercise is remaking India.

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