Guarding against GAAR

Ever since the first avatar of GAAR found its way into the proposed Direct Taxes Code – version 2010, it has held the attention and imagination of taxpayers and investors. Coming on the heels of the retrospective amendment in the law to overrule the Supreme Court ruling in the case of Vodafone, it was only natural that when GAAR finally found its way into the law in Budget 2012, stakeholders made a high pitched plea to iron out many of the provisions and also to defer the implementation itself. The noise worked and the implementation was pushed to 2013 when Parliament finally approved the 2012 Budget proposals.

As part of wave of reforms that the Government embarked upon in 2012, a committee headed by Dr Parthasarathi Shome was set up to make recommendations on GAAR. The Committee presented its final report in September 2012 and the Finance Minster had in January 2013 indicated that most of the recommendations of the Committee would be accepted, including deferring its implementation to financial year 2015-16.

Yet, with the experience that when it comes to tax laws nothing should be taken for granted unless the fine-print has it loud and clear, all eyes were on Budget 2013 to see to what extent the recommendations of the Committee would be accepted and what further surprises lay in store.

Among the changes that have been made, the most important one is that now GAAR would apply only to those arrangements whose main purpose is to obtain a tax benefit. The provisions also state that factors such as the period for which an arrangement exists and the fact that taxes have been paid under the arrangement may be considered relevant but not sufficient, while determining the applicability of GAAR to an arrangement:

This is a big leap from the existing GAAR provisions, which explicitly and completely disregarded the above mentioned factors while applying GAAR to an arrangement. Interestingly, the Supreme Court had also considered these factors while pronouncing its ruling in favour of Vodafone.

The constitution of the Approving Panel to be formed for the purpose of overseeing GAAR related matters would now be headed by a sitting or retired judge of a High Court. The directions of the panel would be binding on both, the Revenue authorities and the taxpayer. No appeal can be filed against the directions issued by the panel, although an order issued pursuant to such directions can be appealed before the Income-tax Appellate Tribunal.

While no doubt these changes have created much needed comfort, some of the important recommendations of the Shome Committee, which the Finance Minister had announced as having been accepted, do not find place in the proposals.

Among these the grandfathering provisions for investments already in place before August, 2010 and respite for Foreign Institutional Investors or their investors irrespective of whether or not they claim the benefits of the relevant DTAA stand out. It is hoped that at least some of the missing recommendations will be introduced by way of guidelines and rules.

Interestingly, the GAAR amendments are also silent on the applicability or otherwise of GAAR where a Tax Treaty already provides for a specific anti-avoidance provision.

This just lends credence to the view that every possible unilateral measure is being taken to neutralise the benefits under Tax Treaties, with the proposed new 20 per cent tax on share buy-backs being a striking example.

Is GAAR an idea whose time has come? This will remain a topic of debate for the next few years. I would wish in anticipation that the Government actually makes a positive example of the implementation of GAAR

(The author is Partner, BMR Advisors. The views are personal.)

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