By accepting the Shome Committee’s recommendation, the Government has deferred the implementation of GAAR until April 1, 2016.
The fine print, however, has apparently toned down the rigour of the law to a limited extent from what was enacted last year. One of the good proposals now is that GAAR would be applied only if the main purpose, but not one of the main purposes of a transaction is to obtain a tax benefit. This would definitely narrow the scope of its application. However, putting the onus back on the taxpayer to prove that a transaction is not tainted would definitely make life difficult for taxpayers. The broad-basing of the approving panel by including independent non-Revenue members would help check overzealous application. Further, the commercial factors of a transaction can also help prevent application of GAAR.
However, contrary to the Government’s announcement in January 2013 on review of GAAR based on the Shome Committee report, several recommendations that were accepted have not been implemented. First and foremost being the grandfathering of transactions made before August 2010. There is no threshold for exempting smaller transactions. FIIs obtaining tax treaty benefits have also not been excluded from GAAR. This may lead to litigation and flight of liquid capital from the Indian stock markets. Further, there is no mention on the application of GAAR consequences only on the portion of the transaction considered impermissible, as also removing the cascading effect. This can result in double jeopardy for the taxpayer.
One hopes the gaps will be filled before GAAR is ultimately implemented.
(The writer is Executive Director — Tax and Regulatory Services, PwC India.)