A day after the revision of bilateral tax treaty with Mauritius, the finance ministry on Wednesday said GAAR provisions, which are to take effect from April next year, will override the double taxation avoidance agreements (DTAA) provisions in case they are abused.
"GAAR being anti-abuse provision can prevail over treaty if it is proved that it is an abuse of treaty. With LoB (Limitation of Benefit) clause in the treaty being fulfilled, it may be difficult to establish that treaty is being misused," Revenue Secretary Hasmukh Adhia said.
"GAAR applies in case of any company which is trying to abuse the treaty. GAAR is an anti-abuse provision. It applies in case of any situation where there is an abuse of treaty for gaining tax benefit unduly," he added.
The Limitation of Benefit clause under the Double Taxation Avoidance Agreement (DTAA) limits tax benefits to those who meet certain conditions relating to business, residency and investment.
Under the revised tax treaty inked yesterday, India will begin imposing capital gains tax on investments routed through Mauritius from next April to curb tax evasion and round-tripping of funds - a move that may have a significant bearing on capital flows from the island nation.
GAAR was introduced in his 2012-13 Budget speech by the then Finance Minister Pranab Mukherjee with a view to check tax evasion and avoidance. However, its implementation was repeatedly postponed because of the apprehensions expressed by foreign investors.
GAAR, which was originally to be implemented from April 1, 2014, will now come into effect from April 1, 2017 (Assessment Year 2018-19).
It contains provision allowing the government to prospectively tax overseas deals involving local assets. There have been fears that the government may use it to target P-Notes.
Through the use of GAAR, government may try to tax P-Notes as indirect investments, which could attract a tax rate of up to 15 per cent, experts say. To avoid tax altogether under GAAR, an investor may have to prove that P-Notes were not set up specifically to avoid paying taxes.
The government had earlier proposed imposing GAAR for those claiming tax benefit of over Rs 3 crore. The rules are aimed at minimising tax avoidance for investments made by entities based in tax havens.
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