Parthasarathy Shome Panel Recommendations

The Parthasarathy Shome panel was formed by PM of India in 2012, for drawing up the final guidelines on GAAR and mainly to bring about tax clarity and address the concerns of foreign investors. Instead of only FIIs, the panel was asked also to look into issues pertaining to all non-resident tax payers.

With various recommendations to revive the inflow of foreign capital, the panel has advocated postponement of the controversial tax provision by three years till 2016-17 along with abolition of capital gains tax on transfer of securities.

Further, it has suggested that the GAAR provisions should not be invoked to examine the genuineness of the foreign investor entities’ residency in the island nation of Mauritius. Other major recommendations are –

Salient Recommendations

Defer implementation of GAAR

The implementation of GAAR shall be deferred by three years on administrative grounds for which intensive training of tax officers, who would specialise in the finer aspects of international taxation, is needed. The deferral of GAAR by three years on the basis of economic conditions and administrative realities would help mature the thinking in respect of GAAR and accelerate the decision on investment in foreign direct investment (FDI). It identifies the need for training of tax officers and a time-bound disposal of the proceedings to ensure effective implementation.

Threshold of tax benefit

GAAR should be made applicable only if the monetary threshold of tax benefit is Rs.3 crore and more with changes in Income Tax Rules 1962. The committee recommendation of a monetary threshold of tax benefit would filter the smaller tax conflicts out and on the other hand would suggest the need of continued responsive legislation on specific tax-avoidance practices to ensure that the legitimate revenue is raised through voluntary compliance. It clearly highlights that the GAAR is not recommended to be used as revenue raising measure

Mauritius issue

GAAR should not be invoked to examine the genuineness of the residency FII from Mauritius and the government should retain the provisions of the CBDT circular issued in the Year 2000 on acceptance of Tax Residence Certificate (TRC) issued by Mauritius. Over 44 per cent of foreign investment in India comes through Mauritius and Singapore. For investments from Singapore and elsewhere, the benefits offered by India through bilateral treaties should supersede domestic tax laws and it is a constructive step in this regard.

Applying GAAR

GAAR should apply “only in cases of abusive, contrived and artificial arrangements”, the Shome panel suggested that the I-T Act may 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. The report has recognized the business needs in difficult times of undertaking the corporate restructuring and clearly recommends that in a court-approved corporate restructuring, GAAR would not be invoked. Even the intra-group transactions with no effect on overall tax revenue have been recommended to be insulated from the GAAR. This clearly shows the pragmatic approach to the recommendations

Increase Securities Transaction Tax (STT):

The Shome Committee has proposed to do away with short-term capital gains tax by increasing the transaction tax. It asked the government should 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. In order to make the proposal tax neutral, the government may consider increasing the rate of Securities Transaction Tax (STT) appropriately. The proposition seems to be that what the tax which India collects on account of short-term capital gains is, domestically as well as cross border. That number does not seem to be particularly a large number. The thought of the committee seems to say, why not abolish the short-term capital gains tax and if at all there is a deficit, why not tweak the securities transactions tax a bit.

Panel of GAAR

The Approving Panel (AP) for purposes of invoking GAAR provisions should consist of five members, including Chairman, who should be a retired judge of the High Court. Besides, two members should be from outside government and persons of eminence drawn from the fields of accountancy, economics or business, with knowledge of matters of income- tax, and two members should be chief commissioners of income-tax or one Chief Commissioner and one Commissioner. It also suggested that GAAR can be invoked only with the approval of the Commissioner.