Naveen Aggarwal (Partner and Head of Tax (North), KPMG India): “GAAR have currently taken a back seat”

Following the recent protocol signed between Mauritius and India, Naveen Aggarwal, Head of Tax (North India) for KPMG, sheds some light on other relevant issues such as the General Anti Avoidance Rules and the India-Singapore treaty.

BUSINESSMAG. Can you tell us more about the presence of KPMG in India?

KPMG in India has offices in 11 cities and over 2,700 clients across various sectors, including information technology, media and entertainment, telecommunications, financial services, infrastructure and government and consumer markets, to name a few. With over 10,000 professionals, KPMG provides a wide range of services to global and Indian multinational clients with India inbound and outbound investments and interests. KPMG is also strengthening its presence in Tier-II cities to support promoter-driven companies in India. This is a large market which is relatively untapped by professional services firms.

BUSINESSMAG. The increase in fraud cases and financial crimes has resulted in growing scrutiny from regulators worldwide. What changes have been brought about for the auditing and accounting firms in the recent years and what about their impact on the way you and your clients carry out business?

Frauds and financial crimes have gone up substantially across the globe, and regulators are trying to keep pace with sharper and focused legislation. Anti-bribery and corruption laws have existed in various parts of the world but their implementation has been challenging. Companies are putting in place various preventive and monitoring checks to comply with various regulations around this area.

In India, for instance, the new Companies Act 2013 has brought in various measures that require companies to adhere to more stringent compliances and have put the onus on independent directors, audit committees and external auditors to report frauds and fraudulent activity. We have therefore seen a serious spurt in clients’ awareness of their regulatory environment.

BUSINESSMAG. Last year, in Mauritius, there were mixed signals and confusing comments by Mauritian authorities as regards the tax treaty between our two countries. Now that a new protocol has been signed what can be its impact?

As you rightly said, till some time back, reports on the negotiation of tax treaty terms between the two countries have been conflicting and confusing. However, such conflicting views have been put to rest and the long-drawn negotiations between the India and Mauritius governments to amend the tax treaty have resulted in a landmark protocol being signed on May 10. The protocol includes significant amendments to the treaty, particularly source-based taxation of capital gains and interest income of banks. Importantly, the protocol has grandfathering provisions to exempt sale/transfer of shares from source-based taxation till 31 March 2017, under the amended provisions. The protocol has also introduced the Limitation of bene-fits (LOB) clause and a concessional rate in the tax treaty for the transition period (1st April 2017 to 31rd March 2019). Capital gains arising out of derivatives and debt instruments may still remain un-affected as the protocol specifically revokes the capital gains exemption only in respect of shares.

The protocol could have far-reaching consequences on investments coming into India through Singapore because the capital gains exemption in India-Singapore treaty is co-terminus with the India-Mauritius treaty. In summary, the amendments in the protocol are in line with the larger objectives of the current Indian government for providing investors certainty, predictability and a non-adversarial tax regime. Investors have also been assured that past decisions taken on the basis of the pre-amended tax treaty will not be upset by the change in regulations.

BUSINESSMAG. Are the General Anti Avoidance Rules still high on the government’s agenda?

The General Anti Avoidance Rules (GAAR) have currently taken a back seat, as the current government is focused on reinstating investor confidence by assuring a non-adversarial and predictable tax regime.

For now, GAAR have been deferred for implementation till 1st April 2017, to enable a smooth transition for both the taxpayers and tax officers to implement these provisions. Clear guidance and safeguards for implementation of GAAR will go a long way in ensuring a non-adversarial tax regime. The impact of GAAR shall be primarily based on how it is implemented, i.e. if not applied aggressively by the tax authorities, it should not have any significant impact on the economy.

The interplay of GAAR with evolving tax regulations like BEPS, treaty renegotiations, would be interesting and can be assessed only once GAAR are effective.

BUSINESSMAG. Lobbies as well as the Indian media spared no critics against the Mauritian jurisdiction over recent years, accusing Mauritius of round tripping and being a tax haven. Do you share their views?

Mauritius has been one of India’s most significant source of FDI for quite some time. Favourable tax treaty provisions and low Mauritian tax rates have always been an incentive for investors to invest through Mauritius, and there have been instances when Indian tax authorities have raised concerns and attempted to investigate allegations of treaty shopping and round tripping of funds. However, the recent protocol amending the tax treaty will help tackle these long-pending issues.

BUSINESSMAG. Mauritius has gone out its way with regard to what was requested in terms of exchange of information and adding substance. Would this reassure the Indian government?

The recently agreed protocol to the tax treaty amends the existing ‘exchange of information’ clause as per international standards and contains provisions for assistance in collection of taxes. The fact that such a change was mutually acceptable to both the governments is evidence of enhanced focus on substance of transactions. This is reinforced by the press note released by the Indian government which exudes confidence that the changes in the tax treaty will curb revenue loss, prevent double non-taxation, streamline flow of investments and stimulate the flow of information between India and Mauritius.

BUSINESSMAG. Generally speaking, are tax treaties bound to disappear in the future in the wake of initiatives like the Based Erosion and Profit Shifting introduced by OECD countries to address tax avoidance?

The BEPS Action Plans seek to make international taxation principles more robust. While tax treaties are unlikely to disappear, there may be tax treaty renegotiations between countries and/or multilateral instruments being signed by various countries to give effect to BEPS recommendations. This is likely to bring tax treaties on a more level playing field while reducing the instances of tax arbitrage available in certain treaties.

BUSINESSMAG. What about the FATCA introduced by the US government. Mauritius had some difficulties to comply with this. Where do matters stand in India?

In India, implementation of FATCA was significantly delayed with the inter-governmental agreement signed only in July 2015. However, India signed up for OECD’s Common Reporting Standard (CRS) in June 2015, well in time before its intended date of implementation of 1st January 2016. Currently, the relevant rules and guidance notes for the FATCA-CRS compliance requirements are in place in India. Given that this is a fairly nascent regime, there are bound to be challenges in the initial few years, but the preparedness of the industry to address these compliances is much better than before.

• All views and opinions
expressed herein are those of the interviewee and do not represent the views of KPMG India.