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A draft bill known as the Direct Tax Code (“DTC”) has been sent to the Indian Parliament for their consideration. It is anticipated that it will be enacted over the coming year and become effective on 1 April 2012. In its current form, the DTC could have far reaching consequences for foreign investors investing in India. Previous drafts of the DTC contained double taxation treaty override provisions, i.e. in case of conflict between a double taxation treaty and the provisions of the DTC, the one that is later in time would prevail. However, this is no longer the case in the latest draft. The latest draft DTC now provides that where there are different potential tax consequences payable by a taxpayer under a domestic Indian tax law and a tax treaty, the law or tax treaty which is more beneficial to the taxpayer should apply.
While this is undoubtedly good news from the perspective of those who benefit from the Double Taxation Avoidance Agreement between India and Mauritius (the “India DTAA”), it should however be noted that the revised draft, contains what are known as General Anti-Avoidance Rules (“GAAR”). From an investors perspective, a tax treaty would not have preferential status over the Indian domestic law when, inter alia, the GAAR provisions are invoked.
The GAAR provisions are discretionary, have far-reaching implications and give the Indian Tax Authorities very broad powers. It is, however, very important to note that the latest discussion paper clarifies that the GAAR provisions do not envisage that every arrangement for tax mitigation would be liable to be considered as an impermissible avoidance arrangement.
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India’s Direct Tax Code