Budget 2012: FM's new rules on sharp tax practices to increase disputes

Finance minister Pranab Mukherjee has not tinkered with tax rates. However, companies fear the introduction of General Anti-Avoidance Rules (Gaar) to curb sharp tax practices coupled with arbitrary powers to tax officers could increase their total outgo.

“While companies may not be able to quantify the impact at this juncture, Gaar, without adequate safeharbours for genuine transactions, will lead to more litigation. The burden of proof remains on the taxpayer. There is no provision to exclude existing transactions or structures,” says Shefali Goradia, partner, BMR Advisors.


Budget at ET: Budget 2012 | Union Budget | Live Union Budget Blog | Railway Budget 2012 | Budget News | Economic Survey of India


A parliamentary committee on the direct taxes code ( DTC) recommended removing arbitrary powers of tax officers while invoking Gaar to avoid litigation. The budget has not factored in this suggestion.

“None of the checks and balances recommended seem to find a place in the Gaar proposals,” says Sudhir Kapadia, national tax leader, E&Y. Dinesh Kanabar, deputy CEO and chairman (tax), KPMG, echoes a similar view.

“Gaar will haunt us. Also, what do the provisions mean to the Indo-Mauritius tax treaty? These provisions are likely to result in huge tax litigation,” he says. Mauritius-based investors would find the going tough, with the budget saying a residency certificate will be a necessary, but not sufficient, condition to claim benefits of the Indo-Mauritius tax treaty.

The pact exempts investors from Mauritius from paying tax on capital gains from the sale of listed shares in India. The move to check treaty abuse could slacken portfolio investments from Mauritius.

The government also hopes to curb money laundering by mandating taxpayers to declare assets held overseas in tax returns. Taxmen will also have powers to reopen old returns — dating back to 16 years — for taxpayers who have assets overseas. The government hopes to bring back money stashed in Swiss banks.