Decision time on GAAR

When Finance Minister P. Chidambaram returns on Tuesday after attending the annual meetings of the International Monetary Fund and World Bank in Tokyo, a priority item likely to engage his attention would be firming up the Government’s position on the Parthasarathi Shome Expert Committee’s reports. These reports pertain to the General Anti-Avoidance Rules (GAAR), and retrospective amendments relating to taxation of indirect asset transfers.

The Shome panel has proposed GAAR’s implementation to be deferred with effect from April 1, 2016, as against April 1, 2013 provided in this year’s Union Budget and legislated through the Finance Act of 2012.

It has further sought that share transfer transactions between non-residents, wherein the underlying business assets are located in India, be taxed prospectively rather than on retrospective basis.

The latter recommendation, if accepted, would amount to rolling back yet another of the Finance Act’s provisions, enabling the Government to bring to tax past transactions — including Vodafone’s 2007 acquisition of Hutchison Whampoa’s Indian telecom assets, which was structured through transfer of shares between offshore entities.

response to recommendations

Since Pranab Mukherjee’s elevation as President of India and the Finance Ministry portfolio being taken over first by Prime Minister Manmohan Singh and subsequently Chidambaram, the Government has been giving indications of going slow on GAAR and doing away with the retrospective tax amendments that invited flak from global investors.

The first step towards this was taken when Manmohan Singh constituted the Shome panel in July, which was asked to suggest a fresh roadmap for implementation of GAAR and also examine issues arising from retrospective taxation of indirect asset transfers.

The Finance Ministry will now have to take a call on the panel’s recommendations to postpone GAAR’s implementation by three years and do away with the retrospective tax provisions. But these would require going back to Parliament and seeking the necessary legislative amendments.

“If it is necessary to amend the Income Tax Act, we have to find a way to do it”, Chidambaram had said earlier this month.

It is in this context that the Parliamentary Standing Committee on Finance’s meeting next Friday assumes importance. The Committee, headed by Bharatiya Janata Party (BJP) leader and former Finance Minister Yashwant Sinha, is expected to seek clarification from the Government on its current stance on GAAR and the retrospective taxation provisions that are already part of the statute books.

Here, the Government can probably draw some comfort from the BJP’s own position: Both Sinha and BJP’s leader of the opposition in the Rajya Sabha, Arun Jaitley, had actually slammed the Government for introducing the new controversial provisions during the Budget discussions in Parliament.

“How can there be a certainty in tax planning if taxes are to be imposed retrospectively?” Jaitley had asked. Sinha, likewise, had accused the Government of mishandling GAAR and creating a scare among the investors. “We have mentioned a number of safeguards which must be put in place before you implement GAAR. I am not opposed to GAAR, (but it should have) safeguards, including the accountability of the tax administration,” he had said.

The coming week could well see the Government spelling out its formal response to the Shome panel reports and the Parliamentary Standing Committee seeking clarifications on the same.

Telecom spectrum policy

Another important development to watch for this week is a meeting of the Empowered Group of Ministers (EGoM) to decide on the Government’s policy with regard to ‘re-farming’ of telecom spectrum. The Telecom Regulatory Authority of India had suggested that incumbent mobile operators using the 900 MHz frequency band be made to shift to the 1800 MHz band.

The 900 MHz band is considered more efficient and cost effective to offer services, but is currently available only with the old GSM players — namely Bharti Airtel, Vodafone and Idea Cellular. The telecom sector regulator has sought that this band be taken away from the incumbents and put back in the market to give a chance to other GSM operators to also operate on the 900 MHz spectrum.

A separate panel within the Telecom Department has, on the other hand, proposed that the incumbent operators be allowed to retain up to 5 MHz in the 900 MHz band, subject to their paying the market-determined price.

The EGoM, last week, had decided to charge a fee on all mobile operators holding excess spectrum — more than 4.4 MHz for GSM and 2.4 MHz in respect of CDMA. Both this one-time fee as well as the redistribution of the efficient 900 MHz airwaves would be based on the prices to be arrived at in the upcoming 2G spectrum auction. The last date for submitting applications for participating in the auction expires on October 19.