Amid the huge global outcry and debate by the corporate world, the finance minister has taken a step back and taken a decision to go for retroactive taxing of indirect transfer of shares and defer the implementation of General Anti Avoidance Rules (GAAR) provisions from April 2012 to April 2013.
This pragmatic move of deferring GAAR gives a breather to corporates to take a re-look at what they thought was ?acceptable tax planning?. The Supreme Court (SC) judgment in the Vodafone case on what is ?unacceptable avoidance? and ?acceptable tax avoidance? at this juncture would be worth noting. In Azadi Bachao Andolan?s case, the SC had recognised the need and role of tax treaties to promote foreign investments in developing countries. While upholding the principle that the tax treaty is an agreement between two countries and is primarily entered into to promote trade and investments between the two countries. Keeping this fact in view, in the case of Ardex Investment Mauritius, the authority for advance ruling (AAR) held that attempt to take advantage of the Mauritius treaty was not objectionable treaty shopping and accordingly upheld the capital gains exemption under the Mauritian treaty. Holding the manifesto of codifying ?substance over form?, the finance ministry is making all possible arrangements to cement its voice that India is not a tax haven. As clearly stated in the Finance Bill, 2012, continued aggressive tax planning coupled with sophisticated structures (such as routing investments through Mauritius, Singapore, Cayman Islands etc) to camouflage the real intent and purpose of transactions has been the trigger for the introduction of GAAR provisions.
The FM in his speech on Monday acceded to the fact that on account of paucity of time, GAAR provisions were tabled without examining recommendations of the Standing Committee on GAAR in DTC Bill, 2010.
Well, better late than never. This move of making amendments to GAAR provisions such as ? shifting onus of proof in its entirety from taxpayer to the revenue authorities before invoking GAAR, introduction of independent member in GAAR-approving panel and facility to approach AAR for determining the permissibility of an arrangement augurs well. Hopefully, appointment of an independent member as part of the GAAR-approving panel will ensure objectivity and comes as a silver lining.
The recommendations of committee constituted by the finance minister for formulating rules and guidelines would play a fundamental role in giving concrete form to GAAR provisions. They are expected to finalise their recommendation after discussions with various stakeholders by May 31, 2012. Once introduced, GAAR is perceived to play a villainous role at the debut stage; the facility of obtaining advance ruling on applicability of GAAR provisions should be a respite and go a long way in reducing uncertainty before undertaking any cross-border transactions. Notwithstanding the above, efficacy of AAR on these matters will hold the key to future GAAR litigation in the country.
However, what seems to be missing is a clarity on whether provisions of specific anti-avoidance regulations would override the GAAR provisions, as is the case in many countries with similar GAAR provisions.
The government will do well to ensure that the time available now is used to clarify, by way of clear guidelines, the specific fact situations under which GAAR could possibly be invoked. This initiative will go a long way in assuaging the concerns of investors and businesses alike. Pushing GAAR by one year should only be seen as a transient phase, since one cannot foresee with optimism as to what form and shape it will take in the near future. Time to redeem tax benefits is on the cards under GAAR.
The writer is tax partner, Ernst & Young. Views expressed are personal
