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A Strong Case For Gaar

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India and the United Kingdom (UK) have a shared past. Both countries are now working in parallel to introduce statute-based General Anti-Avoidance Rules (Gaar) in their respective domestic laws. A comparison of the two emerging legislations is quite interesting.

Let's look at the differences between the draft UK Gaar and the Indian version. The UK Gaar was debated for four years, and it is now called General Anti-Abuse Rule. The Indian Gaar tends to look at tax avoidance schemes and liberally captures even basic attempts to treaty shop, whereas the UK Gaar is targeted for highly artificial and abusive arrangements. In other words, the draft UK Gaar brings within its purview arrangements with the purpose of obtaining a tax advantage; it is coupled with the ‘abusiveness requirement', thereby disqualifying genuine tax mitigation / planning from Gaar application. The UK authorities consciously adopted this approach, rejecting the introduction of  a broad-based and sweeping Gaar framework. Hence, there is a fundamental difference in how Gaar is viewed in these two jurisdictions.

Is India allowing the pendulum to swing too swiftly? Are we bringing a materially sophisticated and powerful weaponry into our tax policy and administration? And if so, are we equally building strong institutional safeguards to ensure investor confidence and encourage cross-border movement of capital, services and technology? The experience with transfer pricing audits has resulted in build-up of tax claims of over $10 billion last year, most of which is now in litigation and our traditional dispute- resolution machinery is struggling.

Rather, many economies have allowed their tax laws to evolve by initially introducing specific tax avoidance regulations, followed by greater disclosures on tax planning techniques adopted by the taxpayers, introducing targeted anti- abuse rules and focused anti-abuse regulations. All of this allows the tax administration and the taxpayers to adapt, evolve and learn.

The Indian Gaar has not defined the terms critical to the application of the regulations, such as substance and commercial test. The Consultation Document recently issued by the UK government clarifies its intent by targeting the draft Gaar at egregious or very aggressive or highly abusive, contrived and artificial arrangements.

The outcome is that the UK regulations, if implemented in the current form, will have far more limiting impact than the Indian regulations. This means that India will be far more aggressive in application of its Gaar regulation than mature regimes like the UK.

Therefore, not only is India catching up with the mature economies, we are also attempting to be ahead of these in respect of our tax regulations. Does it need to? A finance ministry report indicates that in the years until 2007-08, we had less than 1,000 instances of substantial financial intelligence relating to tax evasion and money laundering. No doubt the instances have increased in the past years. These could well have been addressed by having focused or targeted anti-abuse provisions and stronger enforcement infrastructure. The question is whether we are getting a cat which will catch the mouse, or are we merely letting the cat out among the pigeons?

Nevertheless, our checks and balances need to be strengthened. For example, in India, the invocation of Gaar should be approved by an independent panel. It is proposed to be in the hands of two chief commissioners and a joint secretary from the Ministry of Law and Justice. All countries have independent panels; that is what India should aim for from the beginning. Else, we are setting the stage for widespread tax litigation centred around Gaar.  This will be lengthy as the experience with transfer pricing audits has shown.  The attempt to allow the Authority for Advance Rulings to examine and opine if a transaction is impermissible under Gaar is noble and welcome — this institution needs significant strengthening with more benches and administrative machinery.

Indian revenue authorities are correct — India should have Gaar in their rule book, and the taxpayers and investors are equally right in claiming that checks and balances need to be strengthened to limit the impact of Gaar to highly abusive behaviour. The ball is now with the Prime Minister, who is our new finance minister, to balance the equation, recognising that first and foremost is national interest which requires growth, development and confidence building. 

The author is partner and leader, Direct Tax, BMR Advisors. The views are personal

(This story was published in Businessworld Issue Dated 16-07-2012)