Update: Indian Government to Adopt Majority of Recommendations of Expert Committee on
Indian General Anti
India's Finance Minister announced on January 14, 2013 that the Government of India would adopt amajority of the recommendations of the committee constituted to review India's pending income taxanti
avoidance rule. The committee's recommendations, summarized in a previous
Jones Day Commentary
, "Recommendations of the Expert Committee on the Indian General Anti
AvoidanceRule: A Welcome Step," dated September 2012, are likely to be included in the forthcoming 2013Budget, which will be debated in Parliament in late February 2013.
India's Finance Act, 2012 (the "Act") inserted in the Indian Income Tax Act a general anti
avoidancerule (the "GAAR") permitting the Indian Revenue Service to disregard, in assessing a taxpayer'sliability, any agreement, structure, or device (referred to in the Act as an "arrangement") employednot for bona fide commercial reasons but rather "to obtain, directly or indirectly, a tax benefit."
The GAAR was intended to be effective from April 1, 2014.The GAAR attracted strong opposition from Indian businesses, foreign investors, and even selectforeign governments, such as the Government of Mauritius, which argued that the GAAR wouldviolate benefits secured under that country's tax treaty with India. Consequently, Prime MinisterManmohan Singh constituted an Expert Committee under the leadership of Dr. Parthasarathi Shome(the "Shome Committee") to review the GAAR and make recommendations for its modification andapplication.The resulting draft report was first released for comment on August 31, 2012,
and was receivedfavorably by investors. After considering feedback from investors and others, the Shome Committeesubmitted its final report to the Government on September 30, 2012 (the "Shome CommitteeReport"), which was released to the public on January 14, 2013.
The Finance Minister's Statement
Speaking on behalf of the Cabinet as a whole, the Finance Minister announced on January 14, 2013,that the Government "accepted the major recommendations of the Expert Committee."
Some of the key reforms are as follows:1.
Implementation of GAAR:
The effective date for implementation of the GAAR will be pushed backby two years to April 1, 2016.2.
Primary Purpose Test:
Only arrangements, "the main purpose of which is to obtain a taxbenefit," will be subject to the GAAR. The Act had provided that it would suffice for a tax benefit to be"one of the main purposes" of a targeted arrangement.3.
Grandfathering of Investments:
Investments made before August 30, 2010 will be exempt fromthe GAAR. This reflects only partial acceptance of the Shome Committee's recommendation that allinvestments predating the implementation of the GAAR be grandfathered.4.
Application of GAAR:
The GAAR will not apply in a range of specified situations, such as:
Where the tax benefit resulting from an arrangement is less than INR 30 million (approximatelyUS$550,000);
To a foreign institutional investor, where such investor elects not to claim benefits under a dualtax avoidance treaty, and to nonresident investors in such foreign institutional investor; and
Where a specific anti
avoidance rule applies and the application of the GAAR would result in aduplicative penalty (e.g., in cases involving divided stripping or bonus stripping).5.
Procedural Protections under GAAR:
The Act provides that taxpayers subject to the GAAR wouldbe provided with (i) notice and (ii) an opportunity to prove, first before the Commissioner and thenbefore a reviewing Approving Panel, that the challenged arrangement had a bona fide purposeunrelated to the resulting tax benefit. The Government has committed that a majority of theApproving Panel will be independent of the Indian Revenue Service. While one of the ApprovingPanel's three members will be a Chief Commissioner of Income Tax, the remaining two will be a