There seems to be a sense of relief, by and large, in MNC and editorial circles at the Parthasarathy Shome Committee’s interim report exhorting the government to hold back its horses — in other words, the General Anti-avoidance Rules (GAAR) till 2016-17.
It is amazing that the government is being asked to disown, albeit for a short period, its own baby, given the fact that GAAR was ushered into our tax laws by the Finance Act 2012 pursuant to the commitment made not long ago by G-20 that included India.
If there must be a crackdown on money-laundering and its concomitants, such as under-invoicing and over-invoicing, as urged by the G-20, the time is now for all of us to act. To be sure, the provisions introduced do go overboard and arm the assessing officers with powers that can be used to harass the non-residents as well as those residents who deal with non-residents. But that does not mean we should throw out the baby with the bath water, albeit for a short period.
Unconvincing arguments
Glitches and potentially abusive powers should, by all means, be weeded out, but to say that the country, more specifically, the tax administration is not yet ready to deal with and understand the nuances of international taxation doesn’t really wash.
If we are not ready for GAAR, pray how are we ready for Advance Pricing Agreements (APA) notified as recently as August 30, 2012, in terms of which the competent authority drawn from the CBDT can hammer out pricing agreements for and at the behest of a non-resident subject to concurrence by the Central government?
If our tax officers are out of depth with the nuances of international taxation and must be sufficiently trained before they are allowed to unleash GAAR on international transactions, how come they are presumed to be having expertise in hammering out APA, which too calls for the same expertise in an esoteric area of taxation?
Another disingenuous argument advanced for buying time or postponing the denouement is we should not terrorise international investors at a time when we need them more than ever. This argument is of a piece with the pet argument and long-held view of Finance Minister P. Chidambaram that if we tax the FIIs, they would abandon India in droves; they would vote with their feet against India.
Foreign investors make calculations in terms of post-tax returns. In other words, they factor in the tax impact and move their funds if such returns optimise their overall return on capital. Furthermore, MNCs and non-residents do not have to worry about GAAR if their conscience is clean and clear, and do not try to circumvent tax by resorting to tax havens, reinvoicing centres and other subterfuges.
The Shome Committee perhaps has thought nothing of the fact that GAAR is a part of the Direct Taxes Code (DTC) in the anvil. DTC has been in the air since 2009. If GAAR was kosher in 2009, it must be kosher now. Dithering does not help. Today if we postpone the denouement to 2016-17, the next government might be tempted to push it back further down to, say, 2020 at the behest of vested interests and in a gay spirit of why-not-me-too? In the event GAAR might never see the light of the day because the time would never be propitious for its introduction.
capital gains tax
Parity can be attained in two ways — by righting the wrong and by wronging the right.
The country has been a witness to tycoons and other well-heeled not paying tax on long-term capital gains emanating from registered stock exchanges in India since 2004, when P. Chidambaram ushered in Securities Transactions Tax (STT) in lieu thereof as well as on short-term capital gains.
It is a transaction tax that has set the governmental cash register ringing happily but caused resentment deep down in the hearts of the salaried class in the main. STT leaves those earning long-term capital gains from Indian bourses with just a slap on the wrist, whereas the salaried class willy-nilly has to pay heavy tax relatively through its nose.
The Shome committee wants this horizontal inequity not only to continue, but extended across the board to both the varieties of capital gains. One thought the wrong would have been righted by bringing back capital gains tax, as indeed was proposed by the pristine draft version of the DTC. But vested interests prevailed and scuttled the move.
The pristine version of DTC swore by the truism income is income and therefore there ought to be no distinction between capital gains and salary, or business income, for that matter. The feeling of hurt harboured by the hardworking salaried class would be further aggravated if the government were to abolish capital gains tax on short-term capital gains as well emanating from the Indian bourses.
The present rate is a soft 15 per cent. The committee has opined that FIIs would be inclined to enter India upfront rather than through Mauritius if capital gains tax were to be abolished completely. It is strange that once again the committee has chosen to wrong the right instead of righting the wrong.
What it should have advocated is recommend abrogation of the invidious Indo-Mauritius DTAA that beckons tax avoiders to Mauritius where they make a show of setting up shop and channelise their funds into Indian bourses.
Making funds come into India upfront is indeed a noble objective. It can be achieved not by dangling the carrot of abolition of tax, but by closing the route to tax evasion.
(The author is a New Delhi-based chartered accountant