Finance Minister Chidambaram, true to his desire to periodically make a reformist announcement, surprised all last week by calling for a press interview with announcements on General Anti-Avoidance Rules (GAAR) that were legislated in the 2012 Budget, implementation of which was deferred to 2013. And, in his characteristic style, the announcement was released to the media to ensure that there was no room for interpretation. The brief Q&A session that followed was handled in a manner which suggested that he didn’t want to get dragged into any interpretative issues and preferred leaving the finer details to his officers.
Given the cloud surrounding the hush-hush manner in which the GAAR provision was pushed in Finance Act of 2012, contrary to expectation that it would form an integral part of the Direct Taxes Code (DTC), an evenly rushed draft set of rules in July last year forced the PM to constitute an expert committee (EC) under Dr Shome, to assuage sentiments of taxpayers. MNCs were particularly peeved with draft GAAR rules with FIIs and private equity class of taxpayers feeling an unwelcoming India at a time when business confidence index was at its ebb.
Last week’s announcement should come as a bonus to taxpayers as what the taxpayers were seeking was a milder version of GAAR and a pleasant surprise FM has delivered is a two-year (as opposed to three suggested by EC) deferral, overriding concerns expressed by his officers who have been burning the midnight lamp to meet fiscal deficit targets, an issue close to his heart. His pragmatic approach is clearly driven by an overriding objective to address investor sentiments and he understands there is a cost associated with it. His opening statement that tax avoidance is “frowned upon” is suggestive that the GAAR legislation on implementation would be a potent weapon for arrangements where the sole object is tax avoidance.
Most notable feature of his announcement which is bound to assure MNC’s is in-built checks & balances to allow reasonable opportunity to taxpayers, independence of the panel approving invocation of GAAR and a window for taxpayers to seek an Advance Ruling — all aligned to recommendations of the EC.
On his statement that the order of GAAR panel is binding on taxpayers and administration, it seems to me that his intent was to make it binding on only the Revenue as taxpayers should ideally have a right to file an administrative appeal against any order that gives rise to tax liability. Ideally, the GAAR panel’s order should be appealable (for the taxpayer) to the Tribunal given its binding nature on the tax administration.
FM has imposed an added responsibility on chartered accountants to report tax avoidance arrangements as an integral part of tax audit report. This will now require professional accountants to prepare themselves to fulfill an onerous obligation as invocation of GAAR could make accountants culpable in certain situations where there is deliberate failure to report. On the other hand, a clear chit in the tax audit report could also mean a level of assurance to taxpayer’s arrangements. Though, the FM was unwilling to commit on GAAR impact on India-Mauritius treaty administrative circular 789, it could mean that the revision of treaty is on cards. If for any reason, the renegotiated treaty is not finalised before implementation of GAAR in 16’ (an unlikely scenario), my assessment is that treaty abuse in general, not necessarily with Mauritius, motivated solely for tax reasons would invite GAAR. This will put pressure on tax payers to relook at their treaty structures to ensure that there is adequate substance and a two year deferral seems like FM’s desire to put all tax payers on notice — a fair proposition.
FIIs should be pleased with his simplistic approach — don’t avail of treaty benefit and seek a moratorium from GAAR or subject yourself to GAAR if you seek a treaty relief. Perhaps, before GAAR is applicable, we can expect rejigging of tax on capital market transactions including capital gains tax and securities transaction tax rates - as recommended by EC which he will present as part of Finance Bill.
Grandfathering (GAAR applicability) for investments made up to August 30, 2010, (date when DTC bill of 2010 was introduced in Parliament) has made all experts wonder as to what is the hidden message? Though, MoF would like to reason it out by saying that the DTC Bill introduction signalled its first intend to legislate GAAR, a liberal approach could have been to have the grandfathering date tied in with implementation of GAAR (April 16) or at least its introduction in statute books (April 13). In conclusion, for a change, I didn’t hear any one complaining.
The author is Chairman of BMR Advisors - views are entirely personal. Disclosure: Authors views were sought by the EC