Two-year GAAR respite will help tackle irritants

Written by Anurag Jain | Updated: Jan 18 2013, 06:12am hrs
The suspense over the fate of the General Anti Avoidance Rules (GAAR) has partially lifted with the finance ministers recent statement on the governments decision over its final contours. Over the last few months, the looming GAAR, slated to come into effect from April 2013 with sweeping discretionary powers to tax officers and the lack of an effective safeguard mechanism against its indiscriminate invocation had given taxpayers and the investing community some anxious moments.

An expert committee headed by Parthasarathi Shome to review GAAR had submitted its final report in September 2012. The report, which had been under the consideration of the government for some time, has been made public along with the FMs statement. While the interim recommendations of the expert committee, made available for public comments, had raised hopes for a more balanced GAAR regime with the addressing of a substantial number of genuine concerns, the anxiousness had only partly abated as there was no visibility of its acceptability by the government. The report that the Central Board of Direct Taxes was against some of the recommendations, especially those related to deferment of GAAR, also didnt help much.

The decision to accept major recommendations, albeit with some modifications, should finally bring some relief. While the fine print will be known once Budget 2013 is unveiled, some of the broader decisions are certainly welcome and have cheered sentiments. Let us look at some of the important aspects and implications.

GAAR being deferred by two years should provide the much-needed time to prepare the tax payer and the tax collector for the drastic change in tax regime. It will also provide respite to the otherwise legitimate transactions and arrangements which were already in process when the GAAR regime was announced in 2012 but could not have been completed before GAAR was slated to be effective.

Arrangements, where tax advantage is only one of the purposes or merely incidental would be spared. Thus, transactions structured with an eye on a tax benefit will now not attract GAAR if the main commercial purpose of the transaction can be demonstrated. This would also imply that choosing one option out of the many available under law would not be frowned upon merely because the option chosen was more tax efficient.

The proposed reconstitution of the approving panel to supervise GAAR-related cases is likely to restore confidence in the independence of the panel. The inclusion of a sitting or retired high court judge as its chairperson and an independent subject matter expert as a member would bring the much-needed balance in the panel and will be a deterrent to indiscriminate invocation. One development of some concern is making the directions of the approving panel binding on the tax payer also. The taking away of tax payers remedy to appeal to the appellate tribunal may have been provoked by the change in the constitution of the approving panel, which is certainly more independent and unlikely to be biased in favor of revenue. Also, with the inclusion of a high court judge in the panel, hearing by the appellate tribunal of an appeal against the panels directions may not be appropriate. It seems the only remedy left to the tax payer now would be by way of a writ to a high court or the Supreme Court. This may further increase the burden on courts.

GAAR will apply only to the arrangements wherein the tax benefit is R3 crore (approx $600 thousand) or more. With the tax rate on capital gains ranging from 10-20%, this would translate into gains of R15 crore to R30 crore (approx $3 to 6 million) and much higher sales values. Even at the tax rate of 30% and 40% applicable to domestic and foreign companies, respectively, the threshold for other transactions would be R7.5 crore to R10 crore (approx $1.5 to 2 m). This is a reasonable threshold and should help reduce costs for tax payers as well as the revenue in administering GAAR.

Investments made before August 30, 2010, ie the date of introduction of the Direct Taxes Code Bill 2010 (DTC), will be spared. It is not yet clear if this will apply only to the gains made at time of exit or would also apply to income arising from such investments in the shape of interest, dividends or otherwise. One will need to wait for the Budget proposals and/or any detailed circular that may be issued to ascertain the full implications. With the substantial uncertainty that prevailed over the provisions of the DTC, more so on account of the pending report of the standing committee of the Parliament, the cut off date of August 2010 seems a bit misplaced. A more appropriate date could have been the date of introducing the Finance Bill 2012. The rationale to protect only investments and not other existing structures or arrangements is also not clear.

The decision not to apply GAAR to foreign institutional investors (FIIs), if they give up tax treaty benefits, seems to be superfluous.

The interplay between specific anti-avoidance rules and GAAR is also not fully clear. While, the FM has clarified that only one of them would apply, further guidelines will be issued on this aspect regarding applicability.

An obligation has been cast on the tax auditor to report any tax avoidance scheme. This would prompt tax payers to get into a dialogue with tax auditors before implementing an arrangement or transaction to seek their views. Any differences of opinion would need to be resolved well in advance of the completion of transactions, as reporting of any transaction by the tax auditors would surely weigh with the tax officers and the approving panel. The onus on the tax auditors would become higher and they would need to be vigilant to identify any such arrangements during the course of audit and it which may not have been disclosed by the tax payer.

Conclusion: The decisions so far communicated by the government on the recommendations of the expert committee are largely welcome. Some larger issues have got addressed and hopefully, with time and experience, relatively minor concerns would be taken care of.

The author is partner, BMR Advisors. Views expressed are personal