The question of substance over form has consistently arisen in the implementation of taxation laws. In the Indian context, save in blatant cases of avoidance or use of colourable devices, the form of the transaction has been held sacrosanct. Given that the Indian economy is no longer decoupled from the rest of the world, the influence of international tax regimes was not entirely unexpected. The decision of the Supreme Court in the case of Azadi Bachao Andolan, reiterating the right of a taxpayer to plan his tax affairs and refusing to strike down on treaty shopping, served only to accelerate the need of the government to incorporate a General Anti-Avoidance Rule.
Internationally, several countries have codified the “substance over form” doctrine in the form of GAAR and are administering statutory GAAR provisions. Thus, the law relating to GAAR is a codification of the proposition that while interpreting the tax legislation, substance should be preferred over the legal form. Generally, where there is no business purpose except to obtain a tax benefit, the GAAR provisions would disallow it.
The provisions relating to GAAR appear in Chapter X-A (sections 95 to 102) of the Income-tax Act, 1961. They allow the tax authority to, notwithstanding anything contained in the Act, declare an “arrangement” the assessee has entered into as “impermissible avoidance”. Consequently, the tax liability would also be determined.
The onus of proving there is an impermissible avoidance arrangement is on the Revenue.
The provisions currently give tax authorities wide powers. They can disregard or combine steps or parties in the transaction; reallocate expenses and income between parties; relocate place of residence of a party or location of a transaction or situs of an asset to a place other than provided in the transaction; re-characterise equity into debt, capital into revenue and so on; even look through the arrangement by disregarding any corporate structure.
It is clear that GAAR provides a wide discretion and authority to the tax administration, which can cast an excessive tax and compliance burden on the taxpayer without commensurate remedies. One of the methods normally used to address this is to provide guidance on what the provisions entail and how they would be administered. In keeping with this spirit, the Finance Ministry set up a committee to recommend guidelines for implementation of GAAR and safeguards against abuse.
The draft rules did, to some extent, allay some of the fears industry expressed. It was clarified that the rules would be applied on a prospective basis. Further, it was clarified that GAAR would not apply where the statute had a Special Anti-Avoidance Rule, or SAAR.
However, the examples provided in the guidelines appeared to reinforce the belief that most situations in which industry could obtain a tax benefit would lead to GAAR being invoked. The guidelines also caused great concern amongst foreign investors, prompting the Prime Minister’s Office to set up a committee to review the rules. The committee’s modified rules are expected by the end of the month and, after a second round of consultation, it would suggest final rules to the Government by September 30.
Corporate India has often indicated that the country is not too mature a tax regime for the introduction of GAAR and has sought deferring it. Alternatively, trade chambers and industry bodies have suggested that if GAAR is to be introduced, the Government should do it in phases, while outlining a finite set of situations in which GAAR becomes applicable. Similarly, corporates would want adequate safeguards to ensure GAAR is not used for collecting additional tax, except to check tax avoidance and evasion.
Another important point, especially in the context of the various withholding obligations placed on a taxpayer, is to respect the legal form of the transaction as far as it concerns parties other than the taxpayer in whose case GAAR is invoked. All this is easier said than done, and would call for a fine balancing act.
The present GAAR committee certainly has as unenviable task on hand.
The examples provided in the guidelines appeared to reinforce the belief that most situations in which industry could obtain a tax benefit would lead to GAAR being invoked.