Small Firms and Individuals May Be Exempt from GAAR, Postponement Also Possible

In an attempt to soften the blow of the General Anti-Avoidance Rules (GAAR), India’s Finance Ministry is considering postponing the implementation of the new regime and may completely exempt small firms and individuals.

Specifically, there are reports suggesting that the Finance Ministry may exempt transactions or tax-saving arrangements less than Rs. 15 crore to ensure that only corporate structures of considerable size fall under the scope of the GAAR.

“There are many options on the table that are being considered. We are looking at specifying a threshold to ensure that small firms and investors don’t need to worry,” one ministry official told the Economic Times.

The official also noted that the implementation of the GAAR may be delayed several months, or possibly even until the financial year beginning April 1, 2013. This additional time would grant shareholders the opportunity to debate the new rules while also allowing investors to restructure their businesses to bring them in line with the updated tax code.

However, the final decision will rest with Finance Minister Pranab Mukherjee, and if there are to be any changes, he will announce them when he replies to the debate on the Finance Bill in Parliament in the first week of May.

The GAAR is aimed at preventing companies and individuals from abusing and misusing the country’s taxation policies, but some believe the structure of the regime is insufficiently clear and that the new regime grants tax officials too much power. Under the GAAR, a tax official can deny tax benefits if he/she feels the sole purpose of a particular arrangement is to reduce tax liability.

The rules, proposed to be implemented from April 1, 2012, have worried foreign investors – especially those who route money into the country through Mauritius to benefit from capital gains tax exemption under the India-Mauritius tax treaty. However, local entities have also responded strongly as many feel that tax officials will question every transaction.

“Such tax rules are required, but enough comfort needs to be given to investors instead of creating more uncertainty when uncertainty already prevails in the global economic situation,” a government official said.

The proposed tweaks are still being debated by bureaucrats within the Finance Ministry and officials with knowledge of the situation have said that no final decision has yet been reached.

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