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.