The recommendations of the Shome Committee which went into the General Anti Avoidance Rules (GAAR) proposed in the Budget should be sweet music to overseas investors and companies even as they are bound to disappoint the tax administration and all those interested in equity in taxation. By recommending that it should apply only to cases where tax benefit is the main objective of an arrangement or transaction and not one of the main objectives, the Committee has taken the sting out of GAAR as originally envisaged. Rarely, if ever, can tax authorities prove conclusively that obtaining tax benefit was the main objective of an arrangement or transaction. The Committee’s report should also warm the hearts of foreign investors routing funds into India through sham companies based in Mauritius — it has explicitly stated that “GAAR provisions shall not apply to examine the genuineness of the residency of an entity set up in Mauritius”. In other words, a Tax Residency Certificate from Mauritius is enough to override GAAR provisions. This kills one of the most laudable objectives of the rules as envisaged in the Budget — that of plugging a loophole which foreign institutional investors exploited to avoid paying capital gains tax in India.
The recommendation to defer implementation of even these watered-down proposals until 2016-17 is the final nail in the GAAR coffin. The ostensible reason for this is that tax officers first need to be trained in the finer aspects of international taxation. It is doubtful if even these three years will be enough to impart our officers such deep knowledge simply because the tax-payer versus Revenue conflict is a cat-and-mouse game that evolves constantly. The protest from investors and companies over GAAR is understandable for its intent is to ensure they pay their due taxes. What is not understandable, though, is the government’s diffidence in seeing the Budget proposal through, especially because it is not new and is part of the proposed Direct Taxes Bill. Nor is GAAR a strange animal to overseas investors as many countries including Canada, China and South Africa have codified it in their tax laws. The U.K. is consulting stakeholders over introducing GAAR in its tax laws and has set its sight on next year’s budget. To those arguing that the timing now is not right, the only answer is that no time can presumably be right for such proposals that run against the interests of powerful foreign investors. The government did attempt to plug the Mauritius loophole once in the past when economic conditions were not as bad as they are now but it still had to backtrack following howls from investors. It looks like the stage is being set for an encore now.
