The General Anti-Avoidance Rules (GAAR) have been de-mystified upon the issuance of the final report of the expert committee and its acceptance by the finance minister with certain variations.
The final report carries the suggestions of the first draft with changes mainly in the following aspects. First, to ensure more independence in the functioning of the approving panel, the jurisdictional chief commissioner/commissioner would not sit in deciding a case where their direct subordinates were involved as assessing officers.
Second, an appropriate mechanism has been recommended to be provided to ensure confidentiality of information of the taxpayer.
And third, when a tax officer has to decide an application for lower withholding but the taxpayer is not willing to submit a satisfactory undertaking, it has been recommended that the tax officer be given the power to inform the taxpayer, with prior approval of the commissioner, of his likely tax liability in the eventuality of invocation of GAAR in the assessment proceedings of the payee. The prospect of GAAR proceedings being initiated at the withholding stage itself should have best been eliminated, because once tax avoidance is suspected on the basis of a preliminary understanding, it would most likely result in the invocation of GAAR at the stage of assessment. The committee has sought to justify this on the basis that India has primarily a source-based system of taxation and some assurance of collection may be necessary. It is not very clear what ?assurance of collection? would be met by the power to inform the taxpayer of his likely liability in case GAAR is invoked at the assessment stage.
Almost simultaneously with the publication of the final report of the expert committee, the finance minister made a public statement that the major recommendations of the committee have been accepted ?with some modifications?. To start with, the finance minister has accepted deferral of GAAR by two years, compared to three years as recommended by the expert committee. GAAR is now scheduled to take effect from the financial year beginning April 1, 2015. Hopefully, by the time GAAR is implemented, we would have attained the maturity in tax administration and have built the capacity for implementation of such a law.
Agreeing to replace ?main purpose or one of the main purposes being tax avoidance? with ?main purpose being tax avoidance? is a step that brings a balance in invoking GAAR.
Giving due importance to three major factors in determining commercial substance, namely period of time for which an arrangement exists, the fact that tax has been paid under an arrangement and the fact that an exit route is provided in an arrangement was a crying need and the finance minister has accepted it.
The trust deficit between the government and the citizen led to demand for having outside representation in the approving panel and the finance minister has agreed to this.
Similarly, setting the threshold for GAAR implementation to a somewhat reasonable level of R30 million in taxes, restricting GAAR consequences to that part of an arrangement which is considered to be impermissible, allowing consequential adjustment to the same taxpayer in same as well as different years, building in requirement of detailed reasoning by assessing officer in the show cause notice to the taxpayer and agreeing to setting time limits for disposing off cases by various authorities involved in the administration of GAAR are some of the other noteworthy recommendations that have been accepted.
There exist certain aspects that have potential negative impacts in this otherwise praiseworthy effort to bring stability and instil confidence. For example, the stand to grandfather only those investments which have been made before August 30, 2010, being the date on which the Direct Taxes Code Bill 2010 was introduced, is difficult to understand. In this lies the potential to apply GAAR provisions retrospectively in respect of investments that have been made after August 30, 2010, and before the GAAR provisions become effective.
Further, the decision of approving panel will be binding on the taxpayer. This means the right to appeal to the tribunal against the decision is taken away.
The finance minister has also not clarified on the important aspect of treaty override. The expert committee had suggested that GAAR should not override a tax treaty if the treaty contains limitation of benefit clause. With respect to Mauritius, the expert committee had recommended that where circular 789 of 2000 is applicable, GAAR provisions shall not apply to examine the genuineness of the residence of an entity set up in Mauritius and that the said circular should be retained till elimination of tax on transfer of listed shares.
It has been clarified that GAAR shall not apply to FIIs if they choose not to take benefit of the DTAAs and pay the tax as provided in the domestic law. For non-compliant FIIs, GAAR may be applied if substance in a jurisdiction is not satisfactory. The tax payable, however, would again be computed under the domestic law.
Foreign investment is necessary for sustenance of the Indian economy and one of the prerequisites to attract foreign investment is stability and certainty in tax laws, an aspect badly dented by the overzealous GAAR provisions introduced by the Finance Act 2012. Yesterday?s announcements showcase the finance minister?s honest attempt to undo that. How far it will be successful remains to be seen.
The author is joint tax leader, PwC India. This article has been coauthored by Saurav Bhattacharya, associate director, PwC India
