When the Prime Minister constituted the expert committee on General Anti-Avoidance Rules (GAAR), the business sentiments were at a low-ebb. Just the process of involving the stakeholders and transparent consultation by the committee has helped in giving confidence to the businesses. Its recently published interim report has addressed commercial realities, administrative challenges and technical niceties with commendable balance and poise.
The most significant recommendation to boost the investors? sentiments is to abolish the tax on income (whether business income or capital gains) from transfer of listed securities and till such abolition, to follow circular no 789 issued by CBDT. The circular protects the taxpayer from inquiry into tax residency of foreign institutional investors (FIIs) and other investment funds etc operating from Mauritius. Another step in this direction is to grandfather the investments existing up to the date when GAAR will come into effect. The grandfathering of only existing investment and not existing arrangement deftly balances the taxpayers? and revenue?s concerns. Protecting the existing arrangements may have meant protecting the investments through such arrangements in perpetuity.
The above recommendations will surely be welcomed by the FIIs. The contribution of FIIs in boosting the capital market cannot be over-emphasised and this recommendation, no doubt, is due acknowledgement of that fact. One wishes, however, for more clarity on taxation of foreign direct investments (FDI), which is typically through unlisted shares. India cannot ignore the importance of FDI in its growth story. The new FDI post-GAAR may be hit by GAAR if circular no 789 is withdrawn. We hope the committee will address this concern in its final report.
The criteria of evaluating the commercial substance (period for which the arrangement existed, payment of taxes and exit route provided by the arrangement itself) laid down by the Apex Court in the case of Vodafone, which were statutorily negated, have been recommended to be relevant (though not sufficient). This is a more realistic approach.
A pragmatic suggestion of the committee is to defer the implementation of GAAR by three years to assessment year 2017-18 so that its implications can be better understood, tax administration is given the chance to be more mature and the economic environment is conducive for the implementation of a sophisticated law like GAAR. It would be a good idea to undertake the stock taking in three years? time to see whether the preparedness has achieved the desired maturity and then take the final decision.
The recommendation that GAAR should apply only to those arrangements that have the main purpose (and not one of the main purposes) of obtaining tax benefit is apt. Without the same, GAAR would have had unnecessary overreach, potentially resulting in wastage of revenue resources, harassment of taxpayer and long-drawn litigation.
The safe harbours recommended by the committee are not only logical, but also reflect the recognition of business needs in the current state of economy. The exemption to amalgamations and demergers approved by high courts and intra-group transactions with no impact on overall tax revenue from GAAR will boost corporate restructuring, which is typically aimed to achieve cost efficiency. The recommended negative list will ease the corporate decision-making. It has been recommended that where the Specific Anti-Avoidance Rules (SAAR) applies, the GAAR shall not be invoked. Similarly, the limitation of benefit (LoB) clause, being a SAAR, will exclude the application of GAAR. This will reduce avoidable inquiries for invoking GAAR. The tax mitigation has been distinguished from tax avoidance, which means that tax planning can be done and tax incentive can be availed. A threshold of R30 million of tax benefit for applying GAAR has been recommended.
The committee has taken a leap step in recommending two non-government members in the approving panel of five (including one retired judge of high court). Having two members from outside government in the panel will make the GAAR decision-making unbiased and also technically and commercially more sound. The panel, if headed by a retired judge of the high court, as suggested, will lend desired credibility to the process.
An important and new recommendation is that the tax avoidance schemes above the specified threshold of R30 million, which is considered by the tax auditor as more likely than not to be an impermissible avoidance arrangement (IAA), should be reported in the tax audit report. This would put greater responsibility on the management and the auditor to provide the requisite information regarding the business arrangements.
The recommendation to place on the intranet the details of all GAAR cases in an encrypted manner to comprise an additive log of guidelines for future application is in line with international practice. This will provide advance guidance to the business and revenue, and will help reduce litigation and bring uniformity.
The committee has recommended that while determining the tax consequences of an IAA, corresponding adjustment should be allowed in the case of the same taxpayer in the same year as well as in different years, if any. However, no relief by way of corresponding adjustment has been recommended to be allowed to the counter-party as this is actually a punitive measure for deterrence.
If these guidelines are implemented, the GAAR legislation would certainly become more balanced and comparable to international benchmarks. One word of caution though: the proposal to arm the TDS officer to apply GAAR while disposing off a withholding application needs a rethink, otherwise much of the good thinking that has gone behind these otherwise brilliant suggestions may be of no avail.
With inputs from Saurav Bhattacharya, associate director, PwC India
Shyamal Mukherjee is joint tax leader, PwC India
