The War over GAAR

by Mr. Dev Chaudhary, 5th year, BA LLB (Hons) Jindal Global Law School

Mauritius, an island nation sixteen hundred times smaller than India in size and an economy relatively smaller, single-handedly contributes in excess of forty percent of foreign direct investment in India as reported by the Reserve Bank of India (RBI Annual Report, Published 22nd August, 2013). It may be argued that these startling figures are an outcome of India-Mauritius Double Taxation Avoidance Agreement (the “DTAA”).

Signed in 1982, the DTAA aims at promoting mutual trade and investment while avoiding double taxation on capital gains (Preamble of the DTAA). Accordingly, the DTAA allows residents of Mauritius to avoid tax liability on capital gains incurred in India (Article 13 of DTAA). Although legitimate, DTAA provisions allegedly involve loopholes that have been timely exploited. The DTAA allows for paper companies to route income through tax havens while diverting a considerable amount of revenue away from the Indian Government.

To scrutinize such aggressive tax planning, the Finance Act of 2012 inserted a new chapter- Chapter- X-A, titled as the ‘General Anti Avoidance Rules’ within the Income Tax Act, 1961. This Chapter X-A intends to penalize colorable devices by looking into the substance of the arrangements in question (See. Section 97 of the Finance Act 2012). Perceived to be ambiguous and conferring wide, discretionary powers to Assessing Officer (the “AO”), the rules met with a critical reception by foreign investors. Consequently, the Prime Minister was persuaded to announce a committee, headed by Dr. Parthasarathy Shome, for revisiting GAAR (Income Tax Department Press Release dated 13th July, 2013). While submitting its recommendations, the Panel suggested that in order to restore the confidence of investors, the enforceability of GAAR be deferred (See. Final Report of GAAR in Income Tax Act, 2012). As of now, the GAAR has been deferred vide a Central Board of Direct Taxes (the “CBDT”) through a notification (CBDT notification dated 23rd September, 2013).

A variant of the GAAR, more accommodating to the concerns of investors is to come into effect on 1stApril, 2016. Some issues of contemporary debate include the retrospective operation of the rules and the grandfathering clause that extends protection to transactions entered into before 30th August, 2010. It further provides for a threshold in order to avail of tax benefits. These rules are aimed at allaying the fears of investors while incorporating detailed procedure and thereby limiting the extent of discretion.

The introduction of GAAR has extensively witnessed the tussle between Government interest to disallow harmful tax planning and commercially- motivated interests of investors. Undoubtedly, the consequences upon corporate practice and business planning could be far- reaching if GAAR is enforced. However, countries are evidently keen to enforce GAAR as opposed to Specific Anti-Avoidance Rules (the “SAAR”) due to the fast-changing nature of business and capital transactions. This is due to non-comprehensive nature, and consequently, failure of SAAR to target all arrangements and provide wide powers to AO. The enactment of GAAR could prove to be a major, albeit a tough decision, for Indian Government of its investment-related aspirations. All these changes could prove to be a welcome step for the Indian exchequer if the rules are enacted and implemented as planned, in 2016.