Decoding Finance Bill 2012

Anshu Khanna, Partner - Tax and Regulatory Services, Walker, Chandiok & Co
GAAR – Impact on tax planning

A Sovereign state which has the power to enact laws, should enact appropriate laws to safeguard its own interest and in the better interests of its people. Effective and express legislation enforces clarity and certainty to an investor upfront on what a country holds for him/her at the threshold. For an express legislation to be effective, yardstick is how the legislators and subordinate authorities implement and enforce the same. The express legislation which is effectively implemented leaves no room for surprises and distress, letting an investor to take an informed decision before making a foothold in any country.
True, the above is for a country like India which has been a lucrative destination for doing business for various business houses. India must offer certainty and repose the confidence in one and every who views India as a stop to set-up business operations.
With the introduction of GAAR in the present Act, anticipation and apprehension around its codification in the Indian Income Tax history which was surmounting day by day has come to rest. The Supreme Court of India has advocated bringing in codified legislation to counter aggressive tax avoidance and subscribed to the fact that the codified law advances certainty to an investor.
Having said this, let us do an encore.
  • Is the timing right for India to legislate a code like that of GAAR?
  • Is India ready or to put it differently, have we analysed the tangible impact of bringing in GAAR?
  • Will India’s viability as lucrative jurisdiction for business operations be getting lost?
  • What are India Inc’s apprehensions? And
  • What all ironing GAAR needs for it to be express and effective legislation for India?

These questions and many more are making rounds in everyones’ mind. Furore which was created merely with the proposal of GAAR in DTC two years back has now become reality and more furore can be expected from both sides i.e. tax payers and the tax department.
GAAR remains an enigma till it is tested in Indian waters. Though the powers of an assessing officer seems to go through two-layered filtration process – one at CIT level and other at level of Approving Panel, yet the current dispute standards set by the tax department does not let investor to not get worried of his/her legitimate actions as well.
Gargantuan exercise to apply GAAR and complete the process is to be watched out for. But it appears that legitimate tax planning has to be more than legitimate to escape being struck in the web of GAAR. Documentation to be put in place to secure a safe position away from the trigger point of GAAR.  How one achieves the sanity, one may ponder over.
It would be good governance on the part of the tax department if GAAR is invoked in actual tax evasion transaction only. Looking at the present form of GAAR, all transaction even if having a miniscule tax benefit may attract GAAR. Investors will welcome these provisions in spirit if the Government reflects that no undue hardship being caused to a rational businessman and makes sure that implementation is in more mature & neutral hands. It would not be less than ideal if certain industry experts are nominated for the Approving Panel so that long-term approach can be culled out in a transaction much above than one-time tax benefit i.e. rational analysis of the problem on hand. Business purpose should continue to resonate and be appreciated by the tax department.
Today, when world economies are changing constantly and businesses are looking at inorganic growth, business reorganizations are natural more than common. These reorganizations not only aim at achieving economies of scale or synergies but also channelize capital to core competencies. With GAAR coming in, these advantages may be outperformed by tax challenge in the form of GAAR. Clarity on imperative tax aspects of GAAR will redefine frontiers for India and growth trajectory, India is on.
Though the Indian legislators have casted GAAR in lines with the internationally accepted standards of anti-avoidance measures, even since the concept of GAAR made a debut in the DTC, India Inc has been making several representations and efforts to ensure that GAAR does not end up putting extraneous burden or arouse anxiety among the taxpayers to the extent that they don’t take up sound commercial decisions under the fear of GAAR.
GAAR provisions, as proposed, would apply to a taxpayer irrespective of the fact that the treaty provisions are more beneficial. It may be noted that a unilateral enactment of a new domestic tax law which is contrary to an existing treaty, without an amendment in treaty could possibly be regarded as violation of international law and is generally known as ‘treaty override’. How international community will perceive the same that is for the times ahead to tell.
Some of the important recommendations of the Parliamentary Standard Committee on Finance (as mentioned below) are yet to be incorporated in GAAR as proposed under the Finance Bill, 2012:
  • Suitable grandfathering provisions may be made to protect the interest of the tax- payers who have entered into structures / arrangements under the existing law
  • Uncertainties with regard to applicability of tax treaty provisions to be removed so that India’s credibility as a reliable treaty partner is not affected
  • Proposals should not lead to any fiscal uncertainty or ambiguity;
  • It should be ensured that any of the proposals do not pave the way for increased and avoidable litigation.

To conclude, it is important to have adequate built –in safeguards to ensure it does not unleash unnecessary litigation. It is understood that GAAR is best implemented in a climate of trust…in an environment in which there is faith in the transparency, fair play and reasonableness of the administration.