Time to act

With the General Anti Avoidance Rules set to come into force this April, suggestions to push the deadline are getting louder. The Centre, however, should go ahead with the enforcement of these rules that will give tax authorities the right to question all arrangements made specifically with the intent to avoid tax. When GAAR was first proposed in 2013, there had been a sell-off in equity markets, forcing the Centre to push the implementation date by two years. In 2015, Finance Minister Arun Jaitley gave a further reprieve, postponing the implementation by two more years, citing the impending adoption of the Base Erosion and Profit Shifting (BEPS) project recommendations as a reason. Pursuant to this, GAAR provisions will be applicable on the income arising 2017-18 onwards; investments made prior to April 1, 2017, are protected from these provisions.

While there are concerns from some quarters regarding the hardship that companies and individuals could face once GAAR is implemented — as tax authorities begin investigating and questioning all tax saving arrangements — these fears appear overdone. One, the key segment these rules were targeting were foreign portfolio investors who had set up shell companies in countries such as Mauritius and Singapore to save capital gains tax on their investments in Indian equity. Sufficient time has already been provided to these investors to route their investments through other countries. NSDL data show that incremental flows into Indian equity markets from Mauritius-based foreign investors was just ₹82,000 crore in the last three years. This is far lower than the ₹2,75,000 crore received from investors based in the US. The changes made in the double tax avoidance treaties of Mauritius and Singapore have also rendered these routes quite ineffective in saving tax. While some short-term volatility is possible in stock markets, most foreign investors are likely to be sufficiently prepared for the onset of the GAAR regime. Two, participatory notes and foreign portfolio investors not using double tax treaties are excluded from the ambit of these rules. Three, foreign direct flows from Mauritius have not been affected in the last 12 months indicating that these are being channelled through more authentic arrangements.

Concerns regarding tax terrorism affecting common taxpayers are a little stretched, for GAAR applies only on transactions where the monetary benefit derived from the tax-saving arrangement exceeds ₹3 crore. Only high networth individuals or corporates deploying innovative ways to mitigate tax will fall within the ambit of these rules.

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