Need debate on the time required to be GAAR-ready: Rajiv Memani

Interview with CEO & country managing partner, EY India

Rajiv Memani, chief executive and country managing partner of EY India and chairman of Confederation of Indian Industry’s tax committee, tells Sudipto Dey why there is a need to defer the implementation of the General Anti Avoidance Rule (GAAR). Edited excerpts:

Why is India Inc jittery about GAAR being rolled out in April 2015? The road map was known to industry through the last two-three years.

For one, industry is looking for guidance and clarity on how GAAR will be interpreted and implemented on the ground, well before the provisions become applicable. The guidelines required by law aren’t in place yet. Detailed guidelines ought to be published and adequate time provided for finalising the norms, after considering comments from all stakeholders.

Second, it must be remembered GAAR, by its very nature, carries with it an element of discretion and subjectivity, which leads to uncertainty. For GAAR to be accepted, there has to be adequate comfort and confidence in the fairness and transparency of the tax administration and its preparedness to fully appreciate business needs and commercial rationale.

The previous government had diluted many initial GAAR provisions. What are industry’s new concerns?

While many of the concerns have been dealt with, there are some that need to be addressed. For instance, the Shome committee clearly recommended GAAR be applied only to cases of aggressive tax abuse. This could be clarified through guidelines and adequate illustrations of cases in which GAAR will be applicable.

Similarly, it needs to be clarified that GAAR will not be invoked in case of Specific Anti Avoidance Rule, as in the case of a limitation-on-benefit article in a treaty.

Also, while concerns, in terms of when GAAR can be invoked, have been dealt with (burden of proof on revenue, three-stage approval requirement, including independent approving panel, etc), there is a clear need to address concern on the consequences of invoking GAAR (including implications on an unrelated payer from a withholding tax standpoint, grant of corresponding adjustment, defining the consequences, etc).

Even if the government goes by the Shome panel’s recommendations and defers the GAAR roll-out to April 2016, what makes you confident industry would be GAAR-ready by that time?

There is a clear need to defer the implementation of GAAR. There could be some debate on the time required to be ‘GAAR-ready’, which will depend on the intensity of the effort. The time made available ought to be used effectively to communicate and develop better understanding among taxpayers and the tax administration of the approach, basis and methodology to be adopted in the implementation of GAAR.

This will go a long way in nurturing acceptability, reducing uncertainty, and ensuring consistency and fairness in the implementation of GAAR. The importance of the appropriate implementation of GAAR cannot be over-emphasised. While there is no denying the need to check aggressive tax abuse, adequate steps have to be taken to avoid indiscreet attempts at invoking and applying GAAR, which could impede business, create an environment of uncertainty and significantly increase needless litigation.

Is there empirical evidence to suggest GAAR-like procedures impact foreign inflows?

While I am not aware of such empirical evidence, it must be remembered GAAR is all about implementation. The confidence the business community has on the tax administration might differ significantly among countries. For instance, while the current GAAR regime in South Africa (which is very similar to the Indian GAAR regime) has been in place for several years, it has barely seen any case in which GAAR has been invoked.

It is, however, a truism that GAAR could be a source of significant uncertainty and subjectivity; and uncertainty clearly has an impact on foreign investment. Additionally, in the Indian context, significant foreign investment has come in through treaty-friendly jurisdictions such as Mauritius and their fate will become uncertain once GAAR is implemented.

What are the key lessons India could learn from the experience of other countries that have rolled out GAAR-like provisions?

The key point is not whether GAAR should be introduced, but rather how it is implemented. Before implementing GAAR, it is important to build an atmosphere of trust among taxpayers and tax administrators. Providing appropriate and clear guidance, ensuring fair and judicious administration and expeditious dispute resolution could go a long way in paving the way for an effective and acceptable GAAR regime.