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Business News/ Politics / Policy/  GAAR to override in case bilateral tax treaty is misused: revenue secretary
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GAAR to override in case bilateral tax treaty is misused: revenue secretary

The 'limitation of benefit' clause under the DTAA limits tax benefits to those who meet certain conditions relating to business, residency and investment

Under the revised tax treaty inked on Tuesday, India will begin imposing capital gains tax on investments routed through Mauritius from next April to curb tax evasion and round-tripping of funds. Photo: MintPremium
Under the revised tax treaty inked on Tuesday, India will begin imposing capital gains tax on investments routed through Mauritius from next April to curb tax evasion and round-tripping of funds. Photo: Mint

New Delhi: A day after the revision of bilateral tax treaty with Mauritius, finance ministry on Wednesday said general anti-avoidance rule (GAAR) provisions, which are to take effect from April next year, will override the double taxation avoidance agreement (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 DTAA limits tax benefits to those who meet certain conditions relating to business, residency and investment.

Under the revised tax treaty inked on Tuesday, 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 1 April 2014, will now come into effect from 1 April 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 participatory notes (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%, 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 3 crore. The rules are aimed at minimising tax avoidance for investments made by entities based in tax havens.

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Published: 11 May 2016, 08:52 PM IST
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