GAAR deferred rigour diluted!
A first brush at the report suggests that it is not just bold, but also well-thought out and recognises difficulties that could have been faced by tax payers had the government rushed the implementation of GAAR.
Legislative & administrative changes
Firstly, the proposal to defer its implementation up to April 2015 recognises that an extremely advanced policy change of this kind requires a level of administrative sophistication and trained manpower. The panel's proposals are broadly at two levels --one that would require legislative amendments and the other that would necessitate changes to the draft guidelines.
Besides deferral, important aspects for which a fresh Bill in Parliament will be required include a change in definition of the term 'commercial substance', invocation only in situations where the 'main' (and not one of the main) purpose of an arrangement is to obtain tax benefit. The twin amendments, besides diluting the discretionary power of the administration, assume significance as it affords a critical legal protection to taxpayers.
Commercial substance test strengthened
The panel recommends a negative list of transactions wherein GAAR cannot be invoked. This include share buybacks, tax savings due to business reorganisations pursuant to a court-approved scheme, lease versus sale transactions and debt versus equity form of financing. Some of these transactions in the draft guidelines gave a right to the administration to invoke GAAR if it was demonstrated that one of the main purposes was to claim tax benefit. This augers well with the change in the definition of 'commercial substance' as the commercial expediency test has to be satisfied at the taxpayer's level and I always wondered how the tax administration could sit on a ruling of a rational business person.
Truly independent GAAR panel
The five-member GAAR panel to approve or reject invocation of GAAR is proposed to comprise a chairman, who is a retired judge of a high court and two independent members from the field of accountancy and economics who possess tax knowledge besides two tax commissioners. This is a path-breaking proposal as it departs from the predominance of the tax administration lead panel who are inherently conflicted from adjudication on the matter. This step would strengthen the confidence of taxpayers.
Two cheers to foreign investors
To assuage sentiments of foreign investors, all forms of tax-treaty protection has been proposed, including grandfathering investments and reinforcing the prominence of board circular insofar as Mauritius treaty is concerned. In summary, if foreign investors have made investments in the pre-GAAR era, they would continue to enjoy benefit of the treaty and subsequent incidence of tax would not change due to GAAR.
Though bilateral negotiation of India-Mauritius treaty is an independent issue, the panel has been far-sighted in its approach, recognising the uncertainty and risk faced by FDI and FIIs on investments routed via Mauritius. This should put to rest the debate on availability of treaty benefits. This signals an early closure to the treaty debate with a suitable limitation of benefits (LOB) clause in the amended treaty.
And, capital markets
Taking special note of the importance of FII's and non-resident investors, it has made path-breaking recommendations to exempt all short- and long-term capital gains tax. This is proposed to be extended to all forms of taxpayers, signalling a red carpet for channelising investments in equity markets. Though we will have to wait and see it getting legislated in the Finance Bill of 2013 (or perhaps earlier!), I am sure this move will send trades in an overdrive on Monday as the market opens. More importantly, it sends an important signal to the world at large that India is serious about foreign investment and given the state of world economy, it is willing to roll a red carpet.
The panel's findings will certainly come as a breath of fresh air and set the direction for GAAR, which is calibrated, and shall surely earn the confidence of taxpayers. Though the panel has given a 15-day window to react, a much-anticipated report would be the indirect transfer of assets, something that should be expected in a few weeks.
The author is partner with BMR Legal. Views are personal.
Your Taxand contact for further queries is:
T. +91 124 339 5010
Access past editions of simply tax
First published in the Financial Express, 2 September 2012