Reality check on tax avoidance

There are many worthwhile ideas, whose time, however, may not be now. This certainly applies to the General Anti Avoidance Rules (GAAR), proposed in this year’s Union Budget, whose implementation has already been postponed by a year to April 1, 2013. An Expert Committee under Parthasarathi Shome has now suggested a further three-year deferral to 2016-17. The panel has justified this on the ground that the Government needs to put in place more robust administrative systems and procedures, which not only trap questionable business arrangements, but also end up not giving assessing officers an additional lever for harassment of honest tax payers. Also, proving that an assessee has entered into an arrangement lacking any business purpose other than obtaining tax advantage requires a revenue workforce well versed in the finer aspects of international taxation. Without creating this specialised cadre and a mature administration inspiring confidence among assessees — especially in the context of the GAAR provisions not providing latitude for exercise of discretionary powers — there is more harm to be done by introducing a radically new approach to taxation in a hurry.

But in the absence of laying any precise roadmap for securing such administrative preparedness, the Committee’s recommendation must be seen more as an expedient solution to the predicament that the Government finds itself in. Indeed, the more important ground for putting off GAAR’s implementation has to do with the timing. GAAR’s proposed introduction in the latest Budget was clubbed with retrospective amendments to enable taxation of Vodafone-Hutch type offshore deals. Together, these two measures spooked foreign investors at a time when the rupee was in a free fall, making it imperative for the economy to continue to attract foreign capital. That situation hasn’t changed one bit. A country that recorded a current account deficit of over $78 billion in 2011-12 requires capital inflows to bridge this gap and it cannot, for that reason alone, brush aside the concerns of overseas investors. The Prime Minister, Manmohan Singh, was wise enough to recognise these realities that led him to constitute the Shome Committee in July, which has rightly advocated giving more time and a firm future date for GAAR to take effect. By then, the economic environment would also hopefully be more conducive for its application.

The panel’s other significant recommendation is to do away with tax on gains from transfer of listed securities. This would make it more attractive for foreign fund managers to operate directly out of India, rather than route their investments through Mauritius and other jurisdictions that do not tax any capital gains. Such a move, by making treaty-shopping less beneficial, is also consistent with the central objective of GAAR, to discourage arrangements that are entered into solely for the purposes of obtaining tax advantage. To offset the revenue losses from abolishing capital gains tax, the panel has proposed raising the securities transaction tax (STT) rate. While paying tax on transactions — even if one makes no gain — may seem iniquitous, it is a trade-off that may have to be made, considering the comparative ease and efficiency of levying STT.

Keywords: GAAR, retrospective amendment, GAAR and rules, offshore deals, tax avoidance

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