The stage is set for General Anti Avoidance Rules or GAAR to be effective in India, starting April 1, 2017. ‘GAAR’ is being increasingly adopted in tax laws internationally to target unacceptable tax avoidance practices.
In comparison to Specific Anti Avoidance Rules (SAAR), GAAR is more generic and permit the tax authorities to uphold the substance of the transaction over its form.
Evolved over time Introduced first time in the Direct Taxes Code Bill 2009, the Indian GAAR provisions have evolved specifically after some recommendations of the expert committee report on GAAR (Shome Committee Report) issued in 2012 were adopted by the Government. These include non-applicability of GAAR to transactions where tax benefit to parties does not exceed ₹3 crore in a financial year, exemption from GAAR granted to FIIs, clarification that income from investment transferred prior to April 1, 2017, would not be subject to GAAR, and tax consequences to be limited in case a part of the arrangement is found to be tainted.
However, some key takeaways of the Shome Committee Report such as the need to draw a distinction between tax mitigation and tax evasion, and clarification that GAAR should not be applied to structures that achieve tax mitigation or to cases wherein SAAR is applicable, remain at best only a chapter in the Report.
The underlying tone of the Shome Committee Report that GAAR is an advanced instrument of tax administration and should be implemented with adequate safeguards and after requisite training of tax officers. This is not codified in the GAAR provisions. It is, therefore, neither binding on the Indian tax Authorities nor is it the codified ‘intention’ of the Government.
Nervous reaction Expectedly, taxpayers are getting nervous, and wary of the manner in which the GAAR legislation will be implemented. The Indian GAAR provisions are generically worded, leaving ample scope for subjective interpretation.
For example, what are the parameters that the tax authorities would apply to determine sufficiency of commercial rationale of an arrangement?
It is hoped that the Government will bring in the required clarity and implementation safeguards in the upcoming Budget. In this context, we look at three specific ways in which such clarity can be introduced.
Clarify the position First, it should be clarified that where SAAR is applicable, the provisions of GAAR would not apply. The recently signed protocol amending the India-Singapore tax treaty has inserted a new article, Article 28A, which states that the tax treaty would not prevent either contracting State from applying its domestic tax laws to prevent tax evasion / tax avoidance.
This article has been inserted despite the embedded SAAR, that is, a Limitation of Benefits (LOB) clause found in the India-Singapore tax treaty (with respect to capital gains tax) since 2005 and despite the overriding prefix already provided in the domestic GAAR provisions.
Interestingly, a similar clause was not introduced in the renegotiated India-Mauritius tax treaty which further fuels speculation on its specific introduction in the India-Singapore treaty. It is suggested that where a bilateral treaty has inbuilt safeguards against treaty abuse, GAAR should not be invoked.
Best practices Second, we can look to examples of international best practices such as the detailed GAAR guidance issued by the UK HMRC (which has been made binding on tax authorities and courts that interpret GAAR). The HMRC has clearly outlined the objective of GAAR and its non-applicability to tax-efficient structures.
Furthermore, the guidance provides for adequate safeguards to taxpayers such as putting the onus on HMRC to establish that an arrangement is abusive. There is also a double-reasonableness test which requires the HMRC to prove that the manner in which an arrangement is set up “cannot reasonably be regarded as a reasonable course of action”, requiring the HMRC to obtain opinion from an independent advisory panel as to whether the arrangement constituted a reasonable course of action.
The guidance note contains extensive illustrations of cases that would classify as being ‘abusive’ and cases that would be outside the ambit of GAAR, with each illustration being structured in the following manner: relevant background to the arrangements and relevant tax rules is first given to set the scene; the arrangements in question are then summarised; the relevant tax provisions are listed; the tax analysis provided by the taxpayer in support of the claimed treatment is provided; and finally, the GAAR analysis is given.
Issuance of similar guidance by the Government before GAAR becomes effective would be a reassuring and welcome step to provide clarity and confidence to taxpayers.
Timely implementation Lastly, timely notification of GAAR implementation guidance/rules should be ensured so that these are in place prior to GAAR coming into effect (prior to April 1, 2017). In the case of Place of Effective Management (PoEM) provisions which came into effect as of April 1, 2016, to date the implementation guidelines have not been notified although draft guidelines were issued for stakeholder comments in December 2015. And now there is a buzz that PoEM provisions will be done away with to pave the way for the introduction of Controlled Foreign Corporation (CFC) rules! Procrastination in the issuance of such guidance notes results in needless ambiguity and confusion.
If there is objectivity and clarity from the inception on GAAR legislation and the Government takes concrete steps to showcase that this not a tool for harassment but one of deterrence which would be used sparingly, it would go a long way in achieving fairness and equity in taxation along with ease of doing business in India.
Jain is Director, Grant Thornton Advisory Private Limited, and Sahi is a chartered accountant based in New Delhi