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AAR getting ready for GAAR?

Updated on: Apr 08, 2012

This is something like invoking General Anti-tax Avoidance Rules (GAAR)!

Smelling tax avoidance, the Authority for Advance Rulings (AAR) has denied capital gains exemption under the Indo-Mauritius double taxation avoidance agreement to OTIS Mauritius.

The AAR has ruled that the OTIS India's buyback scheme was devised to avoid tax and was a ‘colourable transaction'.

It concluded that profits transferred by OTIS India through buyback would fall under the definition of ‘dividend' under the Indo-Mauritius tax treaty and hence taxable. OTIS India is required to withhold tax, the AAR has said.

OTIS India had approached AAR on two questions:

Should OTIS India withhold tax on the remittance of buyback proceeds to OTIS Mauritius?

Whether OTIS Mauritius is entitled to treaty benefits on capital gains arising from the buyback?

The Income Tax department had argued against both the benefits being allowed. It said the buyback was structured to avoid tax.

The tax department claimed that OTIS Mauritius had responded to the buyback offer only because it could benefit from the capital gains tax exemption provided under the India-Mauritius tax treaty. AAR noted the company had stopped distributing dividend from 2003, the year when Section 115-O of the Income-Tax Act was introduced.

This section related to dividend distribution tax.

AAR accordingly supported the Income-Tax department's stand that the buyback was designed to avoid tax in India.

The buyback, according to the department, was intended to transfer reserves from the books of the Indian company, which accumulated funds by skipping dividends since 2003.

In 2008 and 2010, the Board of OTIS India had put a buyback resolution to its shareholders. OTIS US, OTIS Mauritius and OTIS Singapore are the majority shareholders. On both the occasions only OTIS Mauritius agreed for the buyback.

Advent of GAAR

Finance Bill 2012 proposes to introduce General Anti-Avoidance Rules (GAAR), originally slated to form part of the Direct Taxes Code. GAAR provisions in the Bill are broadly in line with that in the Code, with some expected tweaking to overcome the impact of the Vodafone verdict.

The Memorandum explains that GAAR provisions target aggressive tax planning using sophisticated structures. However, this is not evident in the Bill's provisions.

The wordings of the provision are of very wide amplitude and have potential far reach. The onus on taxpayer to prove that tax avoidance was not the main purpose amounts to a requirement to prove a negative. Absence of the grandfathering provision is creating confusion on the date from which GAAR takes effect.

Though there is no best GAAR model but we can surely learn from the evolution process the GAAR provisions have gone through in other countries. Jurisdictions where GAAR exists typically give copious guidance on important aspects, such as grandfathering, safe harbours, evidences, onus, to name a few.

GAAR provisions in present form are surely to infuse an element of uncertainty in tax consequences with resultant adverse impact on future FDIs, stock market and business sentiment in general, as already evident.

In what form the provisions will be finally carried into the statute; whether the provisions will help in nabbing tax avoidance or whether they will draw the Government into maze of litigation are some of the aspects that will be watched with keen interest by all stakeholders.

Provide more tech support to SMEs

The Budget has rightly provided a significant thrust to small and medium enterprises (SMEs). The importance of SMEs can be gauged from the fact that they contribute 45 per cent industrial output, 40 per cent exports and employ 60 million people. These enterprises are adding 1.3 million jobs year-on-year. However, the Government needs to provide more technology/infrastructure-related support to SMEs. This will encourage them to gear up for global competition and also boost the growth of the economy.

The specific measures announced in this year's Budget for SMEs include the setting up of Rs 5,000-crore India Opportunity Fund with SIDBI, new procurement policy mandating ministries to source a minimum 20 per cent of their annual purchases from SMEs and long term capital gains tax exemption on sale of residential house/plot of land upon subscription to equity of manufacturing SMEs.

Published on November 15, 2017

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