With the government implementing its anti tax avoidance rules from April 1, industry is concerned about the greater subjective authority being given to the tax department and how this could render transactions unprofitable.
The General Anti-Avoidance Rules (GAAR) are designed to prevent the avoidance of tax by taking advantage of international tax laws.
The rules say that if the major outcome of a transaction is a tax benefit and there is no sound business basis for the transaction, then the government can invoke GAAR and reclassify the transaction or the profits arising from it.
“The concern is about the arbitrary usage of the powers that the officers might have under GAAR,” Vipul Jhaveri, Managing Partner, Tax and Regulatory at Deloitte Haskins & Sells told The Hindu . “Conceptually, if the power is used judiciously it can’t be anybody’s argument that any anti-avoidance rule is a bad thing.”
“Canada has had such a law since 1988 and they are still facing problems,” Neha Malhotra, Executive Director at Nangia and Co added. “Such rules create subjectivity. Suppose a transaction makes sound business sense but also results in substantial tax savings, then does it make them a tax evader?”
Similarly, Mr Jhaveri explained, there could be cases where the tax benefit accrues upfront whereas the business advantages of a transaction could accrue only with a delay. In such a case, would the transaction be treated as one conducted purely to evade tax?
In any case, tax experts agree that the government has included several safeguards against bullying by tax authorities, such as several layers of permissions required before GAAR is invoked.
The assessing officer seeking to apply GAAR has to get her proposal vetted by a principal commissioner and then needs to obtain the approval of a panel headed by a high court judge.
“These are the anxieties, that how objective will the principal commissioners be, will they look at it from the revenue perspective or from a business perspective,” Mr. Jhaveri said.
“Under the rules, the tax authorities under GAAR can reclassify a transaction or the profits arising from it and make them taxable,” Ms. Malhotra added. “But that could then undermine the business reasons behind the deal by increasing the deal size or reducing profits.”
Originally, the rules were supposed to be implemented from April 1, 2014 onwards, but protests from foreign investors meant the implementation was delayed twice. Earlier this year, the Income Tax Department issued a set of clarification aimed at clarifying the issues raised by the foreign investors.
The Department clarified that GAAR will not be invoked in cases where investments are routed through tax treaties that have a sufficient limitation of benefit (LOB). Such LOB clauses usually require the investor to meet certain investment and employment requirements so that only resident companies benefit from the deal.
