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BW Businessworld

A Mature Policy Step

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Last week, the GAAR (General Anti- Avoidance Rules) Experts Committee submitted its comprehensive report; it is incisive, nuanced and yet bears an element of empathy towards the taxpayers while heralding an extremely advanced tax policy reform. The first set of administrative guidelines was skeletal, at best; it wasn’t a surprise that the draft received flak for its wide sweep and ambiguity. 

The committee, constituted under eminent economist Parthasarathi Shome, was mandated to lay out a framework for implementing GAAR, based on a review of legislative provisions and draft guidelines.  Broadly, its recommendations are at two different levels: while one set of recommendations would require a legislative amendment to the IT Act, 1961, the other seeks to promote rule-based administration of GAAR. 

Experts Advocate Calibration
The committee’s proposal to defer the implementation of GAAR by three years — to FY17 — is a huge reprieve to investors and, in hindsight, underlines the fact that a fundamental tax policy shift of this proportion requires a high degree of administrative sophistication and skilled manpower. Besides deferral, aspects which would necessitate a fresh Bill in Parliament include a change in the definition of the term ‘commercial substance’, GAAR invocation only in situations where the ‘main purpose’ (and not ‘one of the main purposes’) of an arrangement is to obtain tax benefit. The amendments, besides diluting discretionary powers of the administration, afford a critical legal protection to taxpayers. 

Dilution To Provide A Level-Playing Field
The recommendations significantly dilute the rigour of GAAR legislation by proposing a high threshold (Rs 3 crore) for invocation of GAAR. This should protect genuine low value /bona fide transactions from GAAR purview.  The proposal to identify a ‘negative list’ for GAAR invocation is far-sighted; transactions in the ‘negative list’ such as share buyback, court-approved business reorganisation, debt vs equity form of financing, etc. are routine and the tax administration should not be allowed to sit in judgement as to what constitutes a rational business decision. 

The proposal to clarify that GAAR should not be invoked where SAAR (Specific Anti-Avoidance Rules) prevail, whether under domestic law or the treaty, shall narrow down the apparent conflict between SAAR and GAAR. While renegotiation of a treaty remains a sensitive diplomatic debate, the committee’s recommendation to respect the legitimacy of the India-Mauritius treaty is a bold move to encourage FDI. For other treaties, the committee recommends a dilution of the ‘treaty override’ provision by clarifying that GAAR (and hence, ‘treaty override’) shall not be invoked where the treaty contains anti-avoidance rules. Reference made to LOB conditions under the India- Singapore treaty would reinstate investors’ confidence in Singapore as one of the most preferred jurisdictions for FDI. 

To allay fears of non-resident investors using FIIs as a preferred route for investments, the committee recommends excluding investors beyond the FII stage from GAAR (in case of investment in listed securities). This alone would encourage global investors to embrace GAAR as an important tax reform, not targeted at bona fide taxpayers. 

Preparation Holds The Key
From an implementation standpoint, I am extremely pleased with the committee’s proposal on grandfather investments made prior to the transition date (April 2016); this would provide succour to investors who were on tenterhook since the enactment of GAAR was to be followed by an ambiguous roadmap for its implementation. Besides, the committee’s recommendation to strengthen the institution of Authority for Advance Rulings (AAR)to respect the statutory six-month time frame for issuing rulings is a progressive move and would reinstate taxpayers’ flagging confidence in AAR’s efficacy as the appropriate forum for dispute resolution. 

I am also hopeful that deferred implementation will buy the administration time to scale up its field strength and train revenue officers.  Field-level preparation would hold the key to the effective and intended outcome of GAAR legislation. Taxpayers should should consider aligning their affairs with the impending regime which can no longer be dismissed as an ‘unknown devil’. 
 
Mukesh Butani is chairman, BMR Advisors. 

(This story was published in Businessworld Issue Dated 17-09-2012)