India to Delay Decision on GAAR Implementation

July 21, 2014 Posted by India Briefing Reading Time: 4 minutes

DELHI – India’s implementation of the General Anti-Avoidance Rules (GAAR) will be delayed until next year, according to Revenue Secretary Shaktikanta Das.

Speaking at a session organized by the Confederation of Indian Industry (CII) last week, Das said the new government needed more time to consider the measure after the 2014 Budget failed to address the GAAR or its implementation.

“The new government will study the whole matter and take a view on it in the next budget only,” Das said, effectively implying that the Modi government was postponing any decision on GAAR implementation to 2015.

“The issue of GAAR was not on the table for this budget. It was not an issue on which the government had to make an announcement – we are still about eight months away from that,” Das continued.

As an addition to the Income Tax Act, GAAR aims to mitigate tax avoidance by empowering countries to deny tax treaty benefits to companies and investors without any commercial substance in a jurisdiction – namely Indian companies and foreign investors seeking to route investment through Mauritius and other tax havens to evade taxes. The provisions will, when implemented, apply to tax benefits arising from transactions valued at above INR30 million (US$0.51 million).

The introduction of India’s controversial GAAR was officially delayed at the beginning of 2013 (to April 2016) alongside an announcement that investments made before August 30, 2010 would be immune from increased tax liability under the new provisions. However, the Modi government was initially expected to outline its own timeline for GAAR implementation in its 2014 budget announcement.

The Modi administration’s failure to address the GAAR comes as a surprise to many after the new Prime Minister’s cabinet constituted a special investigative team to recover “black money,” or undeclared income, from international tax havens during its first meeting in May.

In anticipation of GAAR’s implementation, recent statistics indicate that an exodus of India-bound investment from tax havens such as Mauritius has already begun. With Department of Industrial Policy and Promotion (DIPP) data indicating Singapore overtook Mauritius as the leading source of FDI into India last year, investors are already noticeably concerned about the potential for the GAAR to ultimately hold them accountable for post-2010 taxes.

Historically, foreign companies and investors have routed FDI into India through Mauritius-based holding companies to take advantage of the island-nation’s favorable corporate tax regime and lack of withholding and capital gains taxes.

Last year, FDI from Mauritius was down considerably from US$9.5 billion, to only US$4.9 billion in 2013-2014 – the country’s lowest level since 2006-2007. Cumulatively, however, Mauritius remained the top source of FDI into India between 2000 and 2014, however, accounting for 36 percent of total inflows, followed by Singapore (12 percent) and the United Kingdom (10 percent).

Mauritius’ role as a tax haven for foreign companies investing in India was first thrust into the spotlight after Vodafone’s purchase of a stake in Indian conglomerate Essar Group (via Vodafone Mauritius) triggered a series of tax disputes and legal battles with the Indian government — many of which remain ongoing. Since then, Mauritius-routed investment has come under increased scrutiny by the Ministry of Finance and the Indian electorate, leading the island nation to initiate the automatic exchange of tax-related information this May in an attempt to salvage its appeal as a source country for India-bound FDI.

In recent years, Singapore has improved its legal position as a holding company jurisdiction relative to Mauritius by incorporating a Limitation of Benefit (LoB) provision into its Double Taxation Avoidance Agreement (DTA) with India. The LoB provision in the Singapore-India DTA limits the ability of third-country residents to obtain benefits under the DTA by discouraging ‘treaty shopping,’ and consequently grants companies and investors routing investment into India through Singapore additional legal legitimacy relative to GAAR provisions.

With Revenue Secretary Das’ comments the first specifically addressing GAAR since Modi took office in May, more detailed information on the anti-avoidance rules are expected to be forthcoming later this month.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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