Of the many proposed amendments and introductions in Finance Bill 2012, the taxation of indirect transfers (a.k.a. the Vodafone amendment) and the introduction of General Anti-Avoidance Rules raised a storm of protest and an accompanying sense of “doom and gloom”.
GAAR attempts to curb tax avoidance, the grey area between tax evasion and tax planning — that is, the modalities adopted to minimise or avoid tax liabilities, which are often within the letter of the law but against its spirit.
Internationally, GAAR provisions have been adopted by Australia, Canada, China, Singapore and over 17 other countries, while court-based anti-avoidance provisions are relied on in developed jurisdictions such as the US and the UK. The Indian Government has relied on GAAR to curb tax avoidance.
In the current economic scenario, where it is important to attract foreign investors, jurisdictions such as the UK are contemplating introduction of Specific Anti-Avoidance Regulations (SAAR) in the form of Controlling Foreign Company Rules, Thin Capitalisation Rules and Exit Tax rules instead of GAAR.
Making a distinction
The key distinctive feature of GAAR, as proposed by the Finance Bill, in comparison with international anti-avoidance practices, is the lack of distinction between tax avoidance arrangements and tax planning measures, which may result in uncertainty leading to controversy. GAAR, in its current format, regards an arrangement as “impermissible avoidance arrangement” if the main purpose or one of the main purposes is to obtain “tax benefit”. This would mean that a taxpayer who genuinely plans his affairs within the four corners of the tax laws to minimise tax liability, as understood and upheld by courts, can possibly be seen as resorting to avoidance arrangement. In comparison, Canada and Australia have legislated anti-avoidance provisions that apply only to a transaction that results in an abuse of tax provisions and is contrary to the intent of the legislature.
Another important distinction is the application of GAAR to arrangements concluded prior to its introduction. The Finance Minister, Mr Pranab Mukherjee, stated that GAAR provisions would apply to income of financial year 2013-14 and later. This suggests that the provisions are applicable to accrual of income and not linked to arrangements. In effect, this empowers revenue authorities to review business arrangements that were concluded earlier. In contrast, Singapore's GAAR provisions, which came into effect from January 1988, specified it would not be applicable to arrangements entered into before that date.
Onus on taxman
The Finance Minister's amendments to the Finance Bill, which were subsequently passed by the Lok Sabha, have primarily addressed the major concerns of business houses. Accepting the recommendation of the Standing Committee, he shifted the onus of proof of tax avoidance to revenue authorities before initiating any action under GAAR. It was earlier proposed that an arrangement that results in any tax benefit shall be presumed to have been an impermissible arrangement unless the assessee proves that was not the main purpose. The amended Finance Bill omits such a clause and shifts the burden of proof on to the Revenue Department to establish that the intent of obtaining tax benefit is one of the main purposes of an arrangement.
The Finance Minister also sought to enhance objectivity and transparency in the application of GAAR by introducing independent members into the GAAR panel. Earlier, the panel, which was empowered to rule on the applicability of GAAR and direct the Revenue Department to act on it, was constituted solely by officers of the Revenue Department in the rank of Commissioner and above. This step towards ensuring independence of the GAAR panel is a welcome one and will instil confidence in the taxpayer.
Advance ruling
Further, the introduction of an enabling provision for obtaining an advance ruling on business arrangements on the permissibility/ impermissibility under GAAR, both by resident as well as non-resident taxpayers, would provide the much-needed clarity and avoid controversy.
The haze surrounding the introduction of GAAR in the Finance Bill has to a great extent been cleared by the Finance Minister in his proposed amendments. His acknowledgement of the need to formulate safeguards against indiscriminate application and his willingness to address all related issues before the application of GAAR from 2013-14 is commendable. Greater clarity is needed on the application of GAAR provisions to permissible tax planning avenues and its implication on previously concluded arrangements.
(Sumanth Karlapudi, Senior Tax Professional, Ernst & Young, has also contributed to the article)
Pravat Jena is Associate Director — Tax Practice, Ernst & Young.