?India will always want source-based taxation?

GAAR has been the subject of much debate as investors await the government?s decisions on the Shome Committee recommendations. Dinesh Kanabar, deputy CEO, KPMG India, believes that with the revenue department convinced it knows how to implement the law, it may be tough for the government to accept the suggestions in toto. Kanabar tells Shobhana Subramanian that while most investors who come in via Mauritius are looking for a tax break, investors are more concerned about certainty on taxation rules.

The Shome committee seems to have diluted the provisions of GAAR?

That may not be exactly the right way to put it. When the provisions of GAAR were introduced, there was a great deal of opposition. Moreover, the committee set up to prescribe the rules, under which GAAR would be implemented, comprised only revenue officials, so there was some skepticism. But the Shome Committee was an independent panel and since GAAR required a debate, the Committee has more than fulfilled this need by inviting all stakeholders to participate. The Committee believed that since GAAR should be pushed back by three years, this may also have been prompted by the mandate from the Prime Minister who suggested the time may not be right to roll out GAAR just yet given the way the global economy is poised. It is not a bad idea to let people get familiar with the rules.

But the grandfathering of the investments means all previous investments go tax-free?

The Committee has suggested that if existing structures are unscrambled, GAAR will not apply. This is a landmark view because the Mauritius treaty would come into the picture. The moment you are talking about GAAR, you are talking about substance, and not all Mauritius companies may have substance. The Shome Committee says rules cannot be changed mid-way, so those who disinvest after GAAR is enforced will not be subject to its rules since they made these investments on the basis of an implied promise. And this is in perpetuity.

The Committee has asked the government to decide on the India-Mauritius treaty?

Yes, the Committee talks about the India-Mauritius treaty, saying the uncertainty should go and that the government cannot take differing stands on the issue and there can?t be different interpretations from the courts. The biggest fear relating to GAAR is how it will be implemented and the Committee has done well to take away the subjectivity of GAAR by giving nearly 20-22 examples of how the rules will apply. So it explains, for example, that if you set up a unit in an SEZ, the unit was planned as envisaged in the law so one can?t accuse you of setting up the unit only to plan your taxes. Also, of the five-member panel that will implement the rules, two will not belong to the revenue department, so it?s an independent panel.

Do you believe the government will accept the Shome Committee recommendations?

I think it is becoming a tough issue. The revenue department says it knows exactly what there is in the law and how to implement it. They are asking why an external committee should recommend what to do. We need to wait and see what the PMO has to say on this. What we need is certainty. Vodafone paid $11 billion to acquire the telecom operations from Hutch and had tax been considered leviable at the time, the parties would have negotiated the consideration accordingly. The unfortunate part is that the Shome Committee has given two sets of recommendations, one on GAAR and another on retrospective amendment, but the government is yet to finalise its stand on the reports.

If the suggestions are accepted, what are the kinds of transactions that could get impacted?

GAAR gets invoked where a transaction is not at arm?s length, where the form is overridden by the substance or when there is an abuse of law. And once GAAR comes into being, every transaction will be measured against it. Take Vodafone, for instance. The original controversy was whether when Vodafone acquired a Cayman Islands company, which had, under its belly, value residing in India, and whether that was taxable. It was not argued on avoidance. Had GAAR been around, the question that would have come up is whether the structure set up by Hutch was for the purpose of avoiding tax or not. So, every transaction will be scrutinised to check whether the primary purpose was to avoid taxes or whether it was a genuine commercial decision.

Would you say there have been many transactions carried out in a manner so as to avoid tax?

That is almost impossible to answer. Investments into India from Mauritius have tax at the heart of them, without an element of doubt. Mauritius accounts for almost 45% of investments into India and none of these investors reside in Mauritius; they are from the US or the UK. So, obviously, they have set up a company in Mauritius to make investments into India and one of the reasons they have done this is tax. Ordinarily, all this would have been covered by GAAR. But now that the Shome Committee has said it should not be covered, it has a different implication, depending on whether the government accepts the recommendations wholly or partly.

How do you feel about retrospective taxation?

A retrospective tax does unnerve investors. While GAAR itself is prospective, applying GAAR to a situation where existing investments are not grandfathered would make it retrospective. Retrospective taxation is not rampant at all anywhere in the world, and the way amendments happen globally is that, in case there is a loophole in the law, it becomes retrospective by a year.

Is a residence-based taxation a good idea?

Residence-based taxation only works where countries have equal trade. A country like India will always want source-based taxation because people will take the money out of the country and India will lose revenues. Taxation will impact the IRR, so investors will look at the effective net tax return. However, investors may not mind paying taxes as long as they know what the return is; it?s the uncertainty that they dislike. So far, the government held that if investments were routed through Mauritius they would not be taxed, so investors took advantage of that.

Should capital gains be waived off for both residents and non-residents?

That was a recommendation in the context of short-term gains. One will have to factor in how much the Securities Transaction Tax will need to be increased to make the exercise revenue-neutral.