Rules for reform

GAAR principle is sound, but it needs tweaking

Prime Minister Manmohan Singh’s decision to set up a committee to look into the implementation of the General Anti-Avoidance Rules (GAAR), framed by the last Union Budget to check tax evasion, is welcome. The four-member committee, led by Icrier chief Parthasarathi Shome, is to consult stakeholders, look at other jurisdictions’ attempts to put similar regulations into effect, and report by September 30. Given the valid concerns that have been expressed about excessive discretion being given to revenue officers, the choice to set up the committee is sensible. It is necessary, also, to calm legitimate investors who have begun to worry that GAAR will become a tool for harassment. Several observers have noted that India’s external account continues to be weak, and scaring away foreign investors might be dangerous. However, that fear should be tempered with facts: foreign institutional investors (FIIs) have not been entirely dissuaded, given that inflows into Indian stocks were greater than $1 billion in the first two weeks of July alone, leaving net inflows for 2012 close to $10 billion.

While the committee must seek all shades of opinion, it must take into account the fact that anti-avoidance rules are the future of tax policy. In India, in particular, the framing of GAAR comes after a sustained period of pressure on the government. Through 2011, former finance minister Pranab Mukherjee was pilloried in Parliament and in the media for not doing enough to crack down on tax evasion and round-tripping of investment via tax havens. It was a major campaign issue in the last general elections; the G20 has vowed to take co-ordinated action against it; and the anti-corruption agitation spoke about the problem extensively. Most moves have been too tentative — for example, the case of 100 wealthy Indians who held funds at HSBC’s Swiss unit is still being treated as a pure income-tax issue, and not as money laundering, in stark comparison to how US authorities are moving against similar problems with HSBC in America. In this context, GAAR has to be seen as a delayed response to sustained political and media pressure. In ensuring that it can be implemented with the minimum of harassment by tax officials who have been granted new powers, it is important to not throw the baby out with the bathwater. Admittedly, this will not be easy, given the campaign mounted by FIIs who not only are attached to their tax-free access to Indian stocks, but would prefer not to be questioned as to the antecedents of the money they are moving around. The committee must ignore this noise, accept the need for GAAR, and press on, avoiding recommendations such as the creation of omnibus exceptions to the rules for FIIs.

GAAR has already been clarified to an extent. The burden of proof has been returned to tax authorities, for example. However, concerns still exist about the nature of the appellate committee notified under GAAR, which should not be limited to tax officers but also include individuals with an understanding of transnational business operations. The Shome committee will no doubt consider other similar tax rules, such as in Australia and Canada, and those currently proposed by the UK government should also be studied. Loopholes should be plugged, and tax officials’ powers tied down so that the scope for misuse of GAAR is minimised. Open, wide-ranging consultations will help put legitimate concerns to rest.