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Corporate India will heave a sigh of relief as the Central Board of Direct Taxes (CBDT) has promised to specify a threshold limit for applying General Anti-Avoidance Rules (GAAR) under the Direct Taxes Code (DTC).
GAAR is a set of rules that invalidates arrangements by entities to avoid tax.
The objective is to prevent taxpayers from taking unintended benefits. It is in addition to the specific anti-avoidance rules such as transfer pricing provisions, dividend stripping transactions in securities, and disallowance of related-party expenses.
“I can understand that if GAAR comes as a piece of legislation, there will be considerable apprehensions... No doubt. But in a moderate tax regime, aggressive tax planning should not be encouraged. That is the basic premise for GAAR.
“But I assure you that while framing rules, we will look at it very carefully and I am sure the apprehensions will be removed to a large extent. Differences will be there,” Mr M. C. Joshi, Chairman, CBDT, said here on Friday.
The CBDT will come out with guidelines specifying the conditions and the manner of application of GAAR provisions, including the threshold limit beyond which it would be invoked, Mr Joshi said. The circumstances in which GAAR may or may not be invoked will also be provided, he added.
Hotly debated
GAAR has been the most fiercely debated aspect of the new DTC, which is to come into force from April 1, 2012. Mr Joshi reiterated the Government's commitment to introduce DTC from that date.
In the absence of specific guidance, corporates are still guessing nervously on the proposed GAAR's reach. India Inc sees GAAR as a Damocles' Sword as the anti-avoidance rules could always be used to deny treaty benefits.
The GAAR provisions are expected to be used for domestic as well as international transactions.
Mr Joshi said that GAAR was an international practice and was part of the legislation of many countries such as Australia, South Africa, Canada and Germany, among others .
India Inc has been lobbying hard for a threshold limit (for a specified amount of tax) to be provided in the DTC Bill beyond which the GAAR should be invoked.
This would enable tax authorities to focus on large transactions to enhance revenue collections and also avoid harassment and possible inconvenience to taxpayers.
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