The General Anti-Avoidance Rules (GAAR) regime in India kicked off from April 1. The objective is to deter taxpayers from entering into abusive and contrived schemes. While such intentions to avoid the misuse of tax laws are welcome, people are very apprehensive, largely because tax authorities will have wider powers under GAAR to challenge any given arrangement. Section 96 (2) of the Income Tax Act, 1961 provides that an arrangement shall be presumed to have been entered into for the purpose of obtaining tax benefits even if the main purpose of a step-in, or a part of the arrangement, is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit. With such powers, the tax authorities can play havoc.
None of the developed countries has such GAAR provisions, which render an arrangement impermissible on the basis of a single step. These discretionary powers to invoke GAAR and undo a transaction that complies with the provisions of the existing tax regime may extensively hinder the business environment. The tax authorities must understand and appreciate that the assesses are not hesitant to pay tax but are apprehensive about the uncertainties in the tax regime. Tax itself is a commercial consideration while evaluating viability and the IRR of a project or determining its purchase consideration, and, therefore, the ask of business is to provide certainty.
A fitting example is section 72A of the Act, which allows carry forward and set-off of losses by an acquiring company if it complies with conditions such as continuation of business of amalgamating company and achieving prescribed levels of production and retaining a major portion of the assets of the amalgamating company.
Here, the legislation, in all its wisdom, thought through the conditions upon which it will allow the carry forward and set-off of losses to an acquiring company. Now, when an assessee acquires a loss-making business, the pertinent commercial considerations include scalability of business, break-even point, existing clientele, location of business, intellectual property, competition, etc, and one important consideration among them is the benefit of set-off of tax losses. However, if after complying with all the conditions laid down in the Act, the assessee is denied set-off of losses three years down the line, the commercial consideration goes for a toss. Had the assessee known this beforehand, she would have negotiated for a lesser purchase price. Such backdoor powers may drastically reduce the expected IRR of a project. Investors are wary of such uncertainties.
Other dilemmas may include whether provisions of transfer-pricing would become applicable on transactions that are currently out of the purview of transfer-pricing provisions, by invoking GAAR.
Why do we really need GAAR and why cannot the legislature codify its intent through Specific Anti-Avoidance Rules (SAAR)? Why can we not fill the gaps in existing legislation by tightening provisions or inserting new conditions to enable taxpayers to assess the tax impact before investing? Why do we need to hand over such wide-ranging powers to a handful of people?
Although we acknowledge the need to curb tax avoidance, we can also achieve this by analysing specific instances of tax avoidance and inserting provisions to prevent them rather than providing such sweeping powers to tax authorities.
The CBDT released a circular on January 27 that increased uncertainty and apprehension amongst stakeholders, as it completely undermined the SAAR and specific treaty Limitation of Benefits (LOBs) by enabling the coexistence of GAAR with SAAR and LOBs.
Recently, the government revised both the Mauritius and Singapore treaties to curb treaty-shopping. These treaties now have conditions such as a minimum expenditure test to be eligible for treaty benefits. LOBs in the tax treaties between countries are fruits of extensive deliberation by the tax authorities of both countries in addressing treaty misuse. We must respect the fact that the legislature has thought the various provisions through and codified such provisions in a manner that would give reasonable comfort against contrived schemes. In its present form, the GAAR will undermine the significance of such codified provisions, as the tax authorities can now challenge any transaction, even if it does not violate the SAAR or the LOBs in international tax treaties.
Uncertainties in the tax regime reduce the ease of doing business. The ministry and the concerned departments shall strive to mitigate these uncertainties to boost investor confidence in the Indian economy. The arbitrary use of GAAR will drive away investments necessary for economic growth. The tax authorities must rely on SAAR and LOBs where it exists, insert new SAAR and LOBs in existing laws and treaties where it does not exist, ensure that the provisions of GAAR are invoked in rarest of cases; GAAR should not be invoked on steps of an arrangement, as tax itself is a commercial consideration.
This certainty will boost investor confidence and create a win-win situation for both the government and taxpayers. This is very critical for India, as we are only now picking up the pace of growth after a lull, and investors across the globe see us as a bright spot among investment destinations.
With inputs from Annu Gupta,
director (M&A Tax), PwC
By Ashutosh Chaturvedi