Panel has delivered, now govt should
Policy Advisory Group
Ernst and Young
Senior tax professional
Ernst and Young
Seldom has a set of recommendations been so curiously awaited by the industry as the ones on general anti-avoidance rules (GAAR) by the expert committee appointed by Prime Minister Manmohan Singh.
The Parthasarathi Shome committee’s mandate was to encourage an informed and transparent debate on the subject, and bring in a balanced, pragmatic perspective on the GAAR guidelines. It is indeed heartening that the committee has fully lived up to the expectations. Duly understanding the industry concerns and the immense challenges that the current GAAR provisions can throw up, the committee has made many positive suggestions. Two significant recommendations are the deferment of the guidelines for three years, and that GAAR should apply only to abusive, contrived and artificial principles, instead of being considered as a tool for revenue generation.
The postponement of GAAR will put to rest the present uncertainty and distrust surrounding India’s tax policy. At the same time, the pre-announcement will send a clear signal that India stands by its intent to curb tax abuse, but with sufficient legislative and administrative preparation to have greater acceptability of the provisions. One of the fundamental objections to the current GAAR has been the wide scope of the provisions. The committee addresses this concern by suggesting a narrowing of their scope to only the arrangements that have the main purpose, as against one of the main purposes, of obtaining tax benefits. Further, it calls for distinguishing between tax mitigation and tax avoidance, suggesting that GAAR should not be invoked for genuine tax mitigation measures such as payment of dividend or the buyback of shares, setting up of a branch or subsidiary, setting up of a unit in a special economic zone, approved amalgamations and demergers, and intra-group transactions. These are indeed welcome suggestions.
A pathbreaking suggestion of the committee is to abolish capital gains tax on listed securities for both residents and non-residents, subject to an increase in the rate of securities transaction tax to make up for any revenue loss. This is truly a bold suggestion, though unlikely to go down well within political circles. If implemented, the move will harmonize India’s tax policy with international practices and make the ground attractive for investors, who are currently reluctant to base their fund management in India due to tax implications and choose the Mauritius and Singapore route for invest in India. It has often been emphazised by the investor community that it would not mind paying a slightly higher tax so long as there is certainty in tax policy. In contrast to the view taken by the earlier GAAR guidelines, the committee has recognized the need to retain the Central Board of Direct Taxes (CBDT) circular on exemption of capital gains under the India-Mauritius tax treaty and limitation of benefits conditions under the India-Singapore tax treaty for the same benefit.
The committee’s recommendation about grandfathering all investments made by a resident or a non-resident, and existing as on the date of commencement of the GAAR provisions, would provide great comfort to the investors that the tax benefit would not be denied through invocation of GAAR at the time of exit. Rightfully, the committee has recommended against a treaty override.
The industry’s demand for making the approving panel broad-based and independent has been incorporated in the suggestions of the committee. The presence of non-government professionals on the panel would bring much-needed practical realities and commercial experience to the table, before any decision is taken by the approving panel.
There are a few suggestions that the committee may like to reconsider. First, reporting of tax-avoidance schemes in the tax audit report, which is above the threshold tax benefit and is considered by the tax auditor as more likely than not an impermissible avoidance arrangement under the Act, needs a review. The proposal has the effect of casting too great an onus on the auditor, whereas this onus should really be on the tax authorities.
Second, the suggestion to make large taxpayer units compulsory for a specified class of taxpayers, reflecting international practice, may be reconsidered as it creates an unintended bias against the large taxpayers. Large does not really mean abusive.
Third, before submitting its final set of recommendations, the committee may bring greater legislative clarity in respect of issues such as transactions between associates and the spirit or the substance, which would be considered while determining if there has been a misuse or abuse of the tax provisions. These must be expressly explained in the legislature to avoid any ambiguity and discretion.
The Shome committee has done a salutary job in the brief term of just about a month in redefining the principles that should guide the GAAR implementation. It has emphasized that GAAR should not be used as potent revenue-generating tool that could question even legitimate tax-planning structures. And, most importantly, India is not ready—both legislatively and administratively—for implementing GAAR at the current juncture.
It is now for the finance minister to consider the recommendations in the right spirit and abide by his recent assurance of taking corrective measures for bringing clarity in tax laws, a stable tax regime, and a non-adversarial tax administration that will facilitate capital flows into India.