In postponing the General Anti-Avoidance Rules (GAAR) of taxation to April 2016 and reducing its rigour, the United Progressive Alliance government has accepted most of the Parthasarathi Shome Committee’s recommendations. Since GAAR has been incorporated in the Finance Act 2012, its deferment can be formalised only during the forthcoming budget. To justify the postponement, the Committee had cited, among other reasons, the need to train tax officials in the finer aspects of international taxation. Days after the government’s announcement, the stock markets that have, of late, been driven by foreign institutional investors (FII) reached new highs. The GAAR decision, coming just weeks before the Union budget, ought to be seen as one of the many signals the government has been sending to revive the ‘animal spirits’ of foreign investors, domestic entrepreneurs and rentiers, in this case specifically to assure them of the continuance of a less onerous tax regime. Some of its other decisions, such as the hike in railway fares before the railway budget and the permission to public sector oil marketing companies to hike diesel prices in a graded manner, are meant to reinforce the perception of a government not loath to take tough, unpopular decisions. Yet the important takeaway from the modified GAAR is that it is meant to please the FIIs and portfolio managers even if, in the process, sound principles of public finance are diluted.
A significant change is to have a multi-member panel comprising just one senior tax official to determine the applicability of GAAR to specific transactions. The expectation is that the inclusion of a judicial and an academic member will ease concerns over possible high-handed behaviour by the tax authorities in their desire to maximise tax revenue. However, only the tax official in the GAAR panel will be accountable to the income tax department and the government. In another important clarification, it has been decided that GAAR will cover only those transactions whose main purpose — as opposed to one of the main purposes — is to get a tax benefit. As a result of this change, the onus of proof on the tax authorities rises exponentially. The status of double taxation avoidance agreements in a post-GAAR regime is still a matter of conjecture. Perhaps the most controversial decision is to exclude offshore derivative instruments, the so-called participatory notes or PN, from GAAR. This is a retreat from the government’s stated position of wanting to know the identity of PN holders, and is a serious setback to anti-money laundering efforts. Once again, as so often in recent times, the government has opted for short-term expediency to support the external sector.
Keywords: Bombay Stock Exchange, Sensex, GAAR, Finance Minister, RBI, Financial stocks
The decision to defer the application of GAAR has been made ostensibly
to attract more investment by FII but in doing so the government's
revenue generation avenues will be severely dented which will resultant
into uncontrolled revenue deficit.
i think it is a best step taken by government in context of recent
slowdown and failure of economy to keep pace with the growth
trajectory.IT will in first instance imbibe foriegn investors to keep up
expectations of investments in india.It will hardly affect hot money
which will flow to india in a formal setup.
Let us admit, for once, that GAAR is a non starter from the beginning. When there are so many tax havens in the world, GAAR loses its sheen.Already the tax dept is burdened with so much of work.
Instead, they can turn their attention and focus in strengthening online reporting by all the tax payers and integrate them to get full history with one ID, it will be a better utilisation of resources and efforts.
Deferment of GAAR to the year 2016 will mean delaying implementing its very purpose of stopping companies from creating “abusive, contrived and artificial” corporate structures to channelise their funds in India with the main purpose of tax evasion. As conceived by government, provisions of GAAR are supposed to meet government’s need for revenue generation as much as protecting the investor’s interest. The fact that by excluding Participatory Notes or PN from the scope of GAAR, government has brought more controversy, has been rightly observed by you saying, “This..is a serious setback to anti-money laundering efforts”. By announcing decisions like this and the rail fare hike as also hike in fuel price before the budget session of parliament, government has made them more vulnerable before the electorate as the common people are more aware of such developments and their consequences than before.
It is very true that dilution of GAAR at this point of time will
surely boost up the morale of foreign investors and speed up the
growth if it is supported by some positive budget add ons.
Government's move to defer GAAR until union budget for the coming fiscal year is a clever move.They are pretending to be reluctant in taxing foreign investors and domestic companies on one hand, but on the other hand, a slow posion has been injected by hiking railway fares and proposed graded diesel hike.
It is becoming clear now; The Government of India is wooing foreign
investments and providing favorable tax regimes for the corporate world,
while it is not shying to prune freebies and populist measures. It
harbingers major policy shift and politics of yester years. May be its
time to check the mood of Left Parties who were a stumbling blocks in
every reforms in the previous UPA-I
How will General Anti-Avoidance Rules (GAAR) become a holistic
solution to pug match fixing is hard to understand. There is no social
audit and transparency for Public while hundreds of dummy companies
get floated say as in case of Nitin Gadkari- President-BJP where the
directors declared were either bakers/drivers/Jyotis/Pundits. When a
Director is shown in a company there is allowance for
transport/car/mobile etc.A better reform with more participation other
then PN of inhouse employees can save the situation.
It was a wise decision to postpone or dilute ill-conceived GAAR which scared away FDI right
when India needed it most in the face of a recession and high current account deficit. Now is
not the time for GAAR!
Defer GAAR, Decrease the tax rates, Boom the fiscal deficit and become Junk.
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