Shome Panel Report on GAAR

The Government had constituted an Expert Committee on General Anti Avoidance Rules (GAAR) to undertake stakeholder consultations and finalise the GAAR guidelines as well as a roadmap for implementation. The Committee, chaired by Dr. Parthasarathi Shome, has submitted its draft report after analysis of the GAAR provisions and noting the concerns expressed by various shareholders. 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.

The terms of reference of the Committee are:

a) Receive comments from stakeholders and the general public on the draft GAAR guidelines which have been published by the Government on its website.

b) Vet and rework the guidelines based on this feedback and publish the second draft of the GAAR guidelines for comments and consultations.

c) Undertake widespread consultations on the second draft GAAR guidelines.

d) Finalize the GAAR guidelines and a roadmap for implementation and submit these to the government.

Highlights of the Recommendations:

a) Recommendations for amendments in the Income-tax Act, 1961

• The implementation of GAAR may be deferred by three years on administrative grounds. GAAR is an extremely advanced instrument of tax administration – one of deterrence, rather than for revenue generation – for which intensive training of tax officers, who would specialize in the finer aspects of international taxation, is needed. Hence GAAR should be deferred for 3 years. But the year, 2016-17, should be announced now. In effect, therefore, GAAR would apply from 2017-18. 

• Abolish the tax on gains arising from transfer of listed securities, whether in the nature of capital gains or business income, to both residents as well as non-residents.

• The Act should be amended to provide that only arrangements which have the main purpose (and not one of the main purposes) of obtaining tax benefit should be covered under GAAR. An arrangement shall be deemed to be lacking commercial substance, if it does not have a significant effect upon the business risks, or net cash flows, of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained.‖

• As regards constitution of the Approving Panel(AP),  the Committee recommends that –

The Approving Panel should consist of five members including 

I. Chairman;

II. The Chairman should be a retired judge of the High Court; 

III. Two members should be from outside Govt. and persons of eminence drawn from the fields of accountancy, economics or business, with knowledge of matters of income-tax; and 

IV. Two members should be Chief Commissioners of income tax; or one Chief Commissioner and one Commissioner.

The Approving Panel should be a permanent body with a secretariat.  It should have a two year term. A decision of the AP should occur by a majority of members.

b) Recommendations under Income tax Rules

• The GAAR provisions should be subject to an overarching principle that – (1) Tax mitigation should be distinguished from tax avoidance before invoking GAAR.

• A monetary threshold of Rs 3 crore of tax benefit (including tax only, and not interest etc) to a taxpayer in a year should be used for the applicability of GAAR provisions. In case of tax deferral, the tax benefit shall be determined based on the present value of money.

c) Other recommendations

The Committee has made following recommendations in respect of tax administration:-

• The administration of Authority for Advance Ruling (AAR) should be strengthened so that an advance ruling may be obtained within the statutory time frame of six months.

• Shall not invoke GAAR where the taxpayer submits a satisfactory undertaking to pay tax along with interest in case it is found that GAAR provisions are applicable in relation to the remittance during the course of assessment proceedings; or  

• To minimize the deficiency of trust between the tax administration and taxpayers, concerted training programmes should be initiated for all AO‘s placed, or to be placed, in the area of international taxation.