So give back to Caesar what is Caesar's, and to God what is God's
— Matthew 22:21 You cannot win with the government. So what if the Supreme Court rejects its case regarding Vodafone? The government has the right to legislate and it seems to be exercising that power with a vengeance. No, we are not referring to the retrospective amendment to tax laws that will allow it to pursue Vodafone again. This is something even more dangerous and goes under the acronym GAAR, or General Anti-Avoidance Rule.
Frightening provisions
If the GAAR proposals in the Budget are passed no transaction can escape tax. Indeed, such is the sweeping nature of the GAAR proposals that tax planning as an art will be threatened with extinction.
Let's begin with the most frightening provision that shifts the onus of proving that a transaction is not tax evasive on to the taxpayer.
“An arrangement which results in any tax benefit (but for the provisions of this Chapter) shall be presumed to have been entered into, or carried out, for the main purpose of obtaining a tax benefit unless the person obtaining the tax benefit proves that obtaining the tax benefit was not the main purpose of the arrangement,” says the proposed Sec. 96(2).
Simply put, the government says that every transaction, howsoever legitimate, will be presumed as tax avoidance and the taxpayer has to prove that it is not so. Does the word draconian come to mind?
A fair rule would have been to put the onus on the taxman to prove that a particular transaction is a sham designed to evade tax. But not so for a government reeling from the Supreme Court judgement in the Vodafone case. The slight that it suffered in the case is reflected in other provisions of the GAAR, too.
The proposed Sec.97(1)(c) says: “An arrangement will be deemed to lack commercial substance if it involves the location of an asset or of a transaction or of the place of residence of any party which would not have been so located for any substantial commercial purpose other than obtaining tax benefit for a party.” The Vodafone deal would not have passed this test.
There are other stringent provisions including one that will give the GAAR a ‘limited treaty override' in the case of cross border transactions. Seen along with the amendments to Sec. 90 and 90A that make submission of Tax Residency Certificate as a necessary but not sufficient condition to avail of Treaty benefits, it is clear that the government aims to stop treaty shopping. For too long overseas entities, not necessarily belonging to Mauritius, have exploited the favourable provisions of the tax treaty with that country to avoid paying taxes in India.
If these are not enough, the Budget also proposes to extend transfer pricing regulations to apply to certain domestic transactions between related entities. This could open a Pandora's box as the taxman can disallow what he deems as ‘unreasonable expenditure' with the onus again being on the taxpayer to prove him otherwise.
Plugging loopholes
The scenario that these proposals together paint is that of a government which means business. The objective is clear: plug all loopholes and generate revenue.
It is a fair objective certainly. If taxpayers take the bad example of Vodafone and start designing structures that are legal but yet help in avoiding tax, how can the government raise revenue? Again, there is tremendous leakage of tax revenues due to the tax treaty with Mauritius that needs to be plugged. Genuine investors in search of profit will certainly come to India even in the absence of the treaty benefit.
The objective of the proposals is, therefore, laudable but there are some concerns. First, does the government have the bandwidth in terms of systems and resources to take on the challenge? The GAAR rules set out an elaborate procedure beginning with the Assessing Officer who will make a reference to the Commissioner for invoking the provisions and going on to an Approving Panel and, if necessary, the Appellate Tribunal.
With such awesome powers in the hands of the department, we need a strong structure to back it up. It is doubtful if the creaky tax machinery that we have now can take on this load. Besides, we also need to be conscious of the hazards of investing such high discretionary power in the hands of the assessing officer.
But the most important concern of all is that of ensuing litigation. There is no doubt whatsoever that litigation between the taxpayer and the government will increase phenomenally. With the taxman empowered to deem any aspect of a given transaction as one designed to avoid tax, the taxpayer will have only the courts to fall back upon. We need to consider if this is a desirable option. None other than lawyers and auditors will benefit and they are probably already laughing away!
If these proposals become law, taxpayers may be better off following the Bible quote mentioned in the beginning. Taking on Caesar (government) is not a viable option anymore.
