However, media reports suggested that the Finance Act, 2012, (Budget 2012) may introduce some of the DTC concepts in the current law (i.e. the Income-Tax Act, 1961) itself.
The most awaited judgment of the Supreme Court in the case of Vodafone is finally pronounced. The judgment takes into consideration several Indian and foreign court rulings on tax avoidance. The Supreme Court has observed that the courts have evolved doctrines like piercing the corporate veil, substance over form, etc, enabling taxation of underlying assets in cases of fraud, sham, tax avoidance, etc. However, genuine strategic tax planning is not ruled out. Interestingly, the Supreme Court, in the Vodafone judgment, has also highlighted the need for legislation on GAAR provisions to prevent tax avoidance.
The current law contains specific provisions, generally referred to as Special Anti Avoidance Rule (SAAR), for specific types of avoidance transactions. SAARs are targeted at specific transactions such as sale and lease back, dividend or bonus stripping, excessive payments to related parties, etc. As against this, GAAR provisions are general provisions not targeted at any specific type of transaction, but could be invoked for any arrangement if certain generic tests are met. Under the proposed provisions GAAR is applicable to an impermissible avoidance arrangement which is defined to mean a step in or a part or whole of an arrangement, whose main purpose is to obtain a tax benefit and it (a) creates rights, or obligations, which would not normally be created between persons dealing at arms length; (b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Code; (c) lacks commercial substance, in whole or in part; or (d) is entered into, or carried out, by means, or in a manner, which would not normally be employed for bona fide purposes.
Prima facie it may appear that the GAAR provisions would be applicable only when the main purpose of a step in or a part or whole of an arrangement is to obtain tax benefit. However, the actual scope may be wider, given that the term arrangement is defined to mean any step in or a part or whole of any transaction, operation, scheme, agreement or understanding, whether enforceable or not, and includes any of the above involving the alienation of property.
Additionally, the proposed provisions start with a presumption that the main purpose of entering into any transaction is to obtain tax benefit and the taxpayer is expected to defend this presumption. Ideally, the initial burden of proof of the allegation that the arrangement was not entered into with a commercial purpose but a preordained colourable or artificial device with the sole purpose of obtaining a tax benefit should be on the revenue authorities. The taxpayers responsibility in such a case would be to prove that the arrangement is entered into mainly for a commercial purpose.
As a general rule, the provisions of the double tax avoidance agreements (tax treaties) would override the provisions of the domestic law. However, the proposed GAAR provisions would override the provisions of the tax. Thus, if GAAR provisions are invoked against a non-resident who is resident of a country with which India has signed a tax treaty, such non-resident would not be able to claim benefit of such tax treaty to the extent GAAR provisions are applicable.
The proposed GAAR provisions are open to substantial subjective interpretations on several aspects such as lack of commercial substance, misuse or abuse of provisions, etc, and give substantial discretionary powers to the revenue authorities. Given the wide scope of these provisions, even those transactions that are not at all tax motivated or the arrangements for availing benefits specifically granted by the law are likely to be treated as tainted transactions. The revenue authorities are given significant powers including powers to ignore certain steps in a transaction or even to rewrite the transaction. The provision virtually empowers revenue authorities to lift the corporate veil to reallocate income/expenses/deductions/relief, negate transactions and even treat several entities as one for tax purposes. Considering the aggressive assessments done by Indian revenue authorities and discretionary powers given to the revenue authorities, the GAAR provisions are likely to create substantial uncertainties and protracted litigation.
While most countries around the world are not doing well economically and the sources of FDI are drying fast, the uncertainties arising from the GAAR provisions would act as an additional damper. SAAR has worked and settled well in the Indian tax system and hence the first and foremost recommendation is to continue with SAAR and if required introduce more of SAAR. If the GAAR provisions are to be introduced in the Indian tax laws, it is advisable that the government sets up an expert committee having representation from various quarters and the proposed provisions are thoroughly examined by this expert committee. Further, the GAAR provisions do exist in few other countries and it is highly recommended that the experience and learning of these countries are considered before introducing GAAR in the Indian law. Further, even in a situation where the GAAR provisions are introduced, it is important that such provisions are not treated and applied as measure for raising additional revenue. The GAAR provisions should be applied only when the transactions are sham or fraudulent.
The author is director, tax & regulatory services, PwC India. Views are personal