Why GAAR spooks corporate India

Trust deficit between taxpayers and tax administrators is the key factor that makes GAAR a non-starter

Quiz Godrej group Chairman Adi Godrej on his views on the General Anti Avoidance Rule (GAAR), a law to counter tax avoidance, and he minces no words. "GAAR should be deferred by three years. Having GAAR does not go down well when the government is talking about steps to improve the ease-of-doing-business environment,"he says.

Like Godrej, most corporate India honchos have strong views on GAAR. When Business Standard spoke to a cross-section of chief executives on their key objections to GAAR, recurring references were made to how it would obstruct the way business was done and impact the flow of foreign funds into the country. Some views bordered on unfounded fear it might herald a "tax inspector raj".

First propounded by former finance minister Pranab Mukherjee in Budget 2012-13, the roll-out of GAAR has already been delayed twice, first to April 2014 and now to April 2015. Chances are it might see the light of day only in 2016, according to the recommendations of an expert committee headed by Parthasarathi Shome.

It's not that the previous government didn't make efforts to assuage industry concerns on GAAR. The previous finance minister had accepted most recommendations of the expert committee and, in September 2013, the Central Board of Direct Taxes (CBDT) brought out relaxed rules and guidelines on GAAR. Also, it deferred its implementation to 2015. However, industry appears far from 'GAAR-ready'.

Tax experts and corporate lawyers feel many of India Inc's concerns are partly valid; they say some of these are based on the perception of the tax administration. "GAAR deals with cases in which tax planning borders on tax avoidance," says K R Sekar, senior partner, Deloitte Haskins & Sells.

An element of subjectivity in GAAR-like procedures creates uncertainty in tax planning for companies, says Sanjay Sanghvi, partner, Khaitan & Co. Industry says in what complicates matters, an element of retrospective application has been built into the GAAR law. According to rules, GAAR does not apply to income from transfer of investments made before August 30, 2010. So, all investments made after August 30, 2010, and up to March 31, 2015, will be exposed to GAAR examination. "The retrospective effect of GAAR has to go," says Saurav Bhattacharya, associate director (direct tax), PwC India.

Tax experts say it is important to prepare a 'negative list' of transactions, specifying cases that would be outside the purview of GAAR, as suggested by the Shome committee. But what miffs corporate India and tax experts most are inadequate confidence-building measures to bridge the trust deficit between taxpayers and tax administrators.

"The government must reduce subjectivity to the minimum. It will be a learning experience, both for taxpayers and tax administrators," says Sanghvi. For that, CBDT must institutionalise a communication mechanism, providing regular clarifications to taxpayers. Tax experts point out that markets such as Canada and South Africa, in which GAAR has been around for many years, have issued a lot of clarifications to taxpayers to make its administration easier. There is also a need to build a dedicated cadre of specialist tax officers to deal with GAAR, something the Shome committee also mentioned. This will need a massive re-training exercise in tax administration, even before GAAR is implemented. As Rajiv Memani, chief executive and country managing partner, EY India, says, GAAR is all about implementation. "The key point is not whether GAAR should be introduced, but rather how it is implemented," he says.

Tax experts say corporate India will have to take a short-term hit, in terms of re-routing its investments from various tax-friendly destinations, once GAAR comes into effect. However, GAAR offers an opportunity to both taxpayers and tax administrators to bridge the rising trust gap that has been plaguing Indian tax administration through the last three-four years.

GAAR: A BUMPY RIDE

• Former finance minister Pranab Mukherjee proposes introduction of GAAR, a law to counter tax avoidance, in his Budget speech in 2012-13
   
• Prime Minister Manmohan Singh constitutes an expert committee under the chairmanship of Parthasarathi Shome to address concerns of stakeholders that the provisions were prone to being misused to cause harassment to taxpayers
   
• The government accepts the Shome committee recommendations in January 2013
   
• On September 23, 2013, the Central Board of Direct Taxes notifies rules based on which GAAR would be administered in India from April 1, 2015

Some of the key provisions of the rules
Minimum threshold for invoking GAAR
GAAR can be invoked only if the value of tax benefit obtained due to the arrangement in the relevant assessment year is at least Rs 3 crore

Applicability of GAAR to foreign institutional investors (FIIs)
GAAR would not apply to sebi-registered FIIs that do not take any benefit under double taxation avoidance agreements (tax treaties) entered by India with other countries, and have invested in listed or unlisted securities

GAAR would also not apply to investment made by FIIs by way of offshore derivative instruments

'Grandfathering' of investments
GAAR will not apply in case of income from transfer of investments made before August 30, 2010

Consequence of impermissible arrangement in a transaction
Applicability of GAAR will be restricted to only that part of the arrangement which is regarded as an 'impermissible avoidance arrangement' by tax authorities, and not to the entire transaction

Key outstanding industry concerns

• Would GAAR apply when there are Special Anti-Avoidance Rules (SAARs) in the Income Tax Act?
   
• Create a 'negative list' of transactions, specifying the cases which will be outside the purview of GAAR
   
• Do away with any retrospective application of the GAAR law. It should be applicable to investments made from the date on which GAAR provisions will be effective
   
• Create a special cadre of GAAR-trained tax administrators