Editorial: Lost in translation

Sep 28 2013, 02:26 IST
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SummaryGAAR rules could do with more clarity

Given how, along with the Vodafone retrospective amendment, the General Anti-Avoidance Rules (GAAR) that then finance minister Pranab Mukherjee had announced spooked investors, finance minister P Chidambaram had done well to defer GAAR by 3 years. Earlier in the year, the finance minister clarified some basic principles and said the rules would apply only from April 1, 2016, calming considerably the frayed nerves of investors. A committee was set up under the FM’s advisor Dr Parthasarathi Shome on both GAAR as well as on the vexed retrospective tax. While investors were looking forward to both reports, sadly the finance minister has not taken a call on the report—it was against retrospective taxation—presumably since he is still trying to persuade Vodafone to make some payment after which the law can be changed.

Welcome as the GAAR rules issued earlier this week are, they continue to confound tax experts and leave considerable scope for interpretation by the taxman, something that has always spooked investors. The GAAR rules talk of an “impermissible avoidance arrangement” which taxation experts say leave the taxman with a lot of leeway in terms of interpretation. Or take the case of FIIs who are coming in from Mauritius or Singapore and taking advantage of the double taxation avoidance agreement with these countries. Are these FII investments to be subject to GAAR or not? While this has been the subject of considerable debate and heartburn in the past, the rules say GAAR will apply to FIIs who have sought a tax advantage under the treaty. Fair enough, you’d say. But the very next sentence goes on to say GAAR will not apply to FIIs who have invested in ‘listed securities or unlisted securities with the prior permission of the competent authority’.

It is obvious that any tax rule is subject to interpretation. While the FM had talked about grandfathering of investments made before August 30, 2010—that is, before the time the finance ministry started talking of a GAAR—the rules say GAAR does not apply to income arising from investments made before August 30, 2010. Since ‘income’ presumably applies to capital gains, GAAR will not apply to old investments that are sold after 2016. Tax experts, however, say the taxman can well rule the other way. Obviously what was required was a lot of examples on the applicability of GAAR, to clarify the intent of the law. What is surprising is

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