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With the Shome Committee having submitted its report with guidelines for the second draft GAAR (General Anti Avoidance Rules), India now has a roadmap for the implementation of the same.
One of the key recommendations of the Shome Committee is to defer the implementation of GAAR by three years. The preannouncement of the date confirms with international practice, and intends to remove uncertainty from the minds of the stakeholders, while also allowing for the tax department as well as the taxpayers to prepare and plan for the change.
This period could also seek to prevent further precipitation of mistrust between the tax payer and the tax collector. To this end, the deferment sits well in the larger picture of presenting a roadmap for implementation. This, however, has met with some criticism, due to the possibility of the constant evolving nature of the tax spectrum making the three-year gestation period redundant.
It is imperative here to take note of the developments on the GAAR front in other countries.
The UK is in the process of introducing GAAR-like provision. Report by Aaronson commissioned by UK indicated the need for the same, but suggested preventing a broad spectrum approach that would hurt responsible tax planning. UK’s 2012 Budget accepted the Report’s recommendations and a year’s consultation now follows before bringing the legislation through the 2013 Finance Bill. It is also instructive to note here that Aaronson report mentions three safeguards for the tax payer, while putting the onus of proof (of legitimacy) on the tax collector. This is in stark contrast to the Indian version.
In both South Africa (IT Act amended in 2006) and Australia, Income Tax Act has provisions similar to GAAR that details steps/tests before submitting a transaction to anti avoidance rules. There are no GAAR like provisions in the US, but it uses five doctrines to similar effect and its “economic substance doctrine” was codified in US law in 2010.
Grey area
In India, definition of substance is still a grey area, and the Shome report has recommended amending the Income Tax Act to include a definition of commercial substance.
Thus, unlike how it appeals to the public perception, these countries’ experience tells us that anti avoidance rules are a global reality.
The recommendation to defer the implementation and not to enquire into the genuineness of the residency certificates (TRC) issued by Mauritius, thus effectively requiring just a TRC to escape GAAR, the draft GAAR apparently has lost its sting, at least at present. But it has taken a measured and consultative approach, that could go hand in hand with the Direct Tax Code, which is also expected to be implemented soon.
Additionally, Indian courts have taken a strictly legal stance, whereas the Shome Committee has favoured purposive interpretation, which is crucial in targeting tax avoidance which is technically legal but may be done with the sheer objective of obtaining a tax benefit without any supporting commercial justification.
(The author is Assistant General Manager, Geojit BNP Paribas Financial Services Ltd. The views are personal)
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