Take it easy

When Minister of State for Finance Nirmala Sitaraman, in a written reply to a parliamentary question on Friday, said that the General Anti Avoidance Rules (GAAR) in the Income Tax Act will be applicable from April 1, 2015, she was merely stating a fact. GAAR was originally to be effective from April 2013, which the previous government deferred by two years. So as things stand, the provisions will kick off from the next fiscal. Yet, >the markets tanked after Sitaraman’s factual position statement. Why? The answer could lie in Arun Jaitley’s Budget, which did not mention a further deferral of GAAR, just as it did not propose to repeal the controversial retrospective tax amendments of 2012.

This suggests the presence of excessive market expectations from a Government barely 50 days in office. True, Jaitley’s > wasn’t a Big Bang maiden Budget . But Manmohan Singh’s ‘historic’ Budget of 1992-93, P Chidambaram’s ‘dream’ Budget in 1997-98 and Yashwant Sinha’s ‘reform’ Budget in 2000-01 came only after they had already presented a budget or two. This Government deserves some time to spell out a concrete strategy on GAAR and retrospective taxation. One couldn’t really have expected this Budget to close the Vodafone tax matter by promising to repeal an amendment enacted two years ago, when cases arising from it are now before various courts. The absence of repeal does not preclude satisfactory agreements being reached in the months ahead on retrospective tax disputes. Similarly, it is sensible to wait rather than presume that GAAR will be implemented from next April.

One reason why GAAR has spooked investors is that the proposal for its introduction in the 2012-13 Budget was clubbed with the retrospective amendments to tax Vodafone-Hutch type offshore deals. Also, both came at a time when India’s external imbalances were widening, leading to the rupee’s free fall. India certainly needs to crack down on tax evasion as well as arrangements solely tailored to obtain a tax advantage. Vodafone’s purchase of Hutchison did result in transfer of real assets in India. The capital gains from this ought to have been taxed, if it was not structured in the form of an offshore transaction involving only shares. This was clearly a case of tax avoidance, but the germane point is that the law at the time did not provide for taxation of indirect transfer of capital assets. GAAR is necessary to plug such abusive and contrived arrangements to escape tax. But this can only be a prospective exercise. Besides, it requires a specialised revenue cadre well versed in the finer aspects of international taxation. Ultimately, honest businesses need to be convinced that fiddling with the tax law is not carried out for the sake of harassment. It is better to be sure about what one is doing before implementing GAAR in a hurry.

COMMENT NOW