Update: Indian Government To Adopt Majority Of Recommendations Of Expert Committee On Indian General Anti-Avoidance Rule

Author:Mr Karthik Kumar and Nikhil V. Gore
Profession:Jones Day
 
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India's Finance Minister announced on January 14, 2013 that the Government of India would adopt a majority of the recommendations of the committee constituted to review India's pending income tax anti-avoidance rule. The committee's recommendations, summarized in a previous Jones Day Commentary, " Recommendations of the Expert Committee on the Indian General Anti-Avoidance Rule: A Welcome Step," dated September 2012, are likely to be included in the forthcoming 2013 Budget, which will be debated in Parliament in late February 2013.

Background

India's Finance Act, 2012 (the "Act") inserted into the Indian Income Tax Act a general anti-avoidance rule (the "GAAR") permitting the Indian Revenue Service to disregard, in assessing a taxpayer's liability, any agreement, structure, or device (referred to in the Act as an "arrangement") employed not for bona fide commercial reasons but rather "to obtain, directly or indirectly, a tax benefit."1 The GAAR was intended to be effective from April 1, 2014. The GAAR attracted strong opposition from Indian businesses, foreign investors, and even select foreign governments, such as the Government of Mauritius, which argued that the GAAR would violate benefits secured under that country's tax treaty with India. Consequently, Prime Minister Manmohan 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 and application. The resulting draft report was first released for comment on August 31, 2012,2 and was received favorably by investors. After considering feedback from investors and others, the Shome Committee submitted its final report to the Government on September 30, 2012 (the "Shome Committee Report"), 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 that the Government "accepted the major recommendations of the Expert Committee."3 Some of the key reforms are as follows:

1. Implementation of GAAR: The effective date for implementation of the GAAR will be pushed back by two years to April 1, 2016. 2. Primary Purpose Test: Only arrangements, "the main purpose of which is to obtain a tax benefit," 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:...

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