In order to attract foreign direct investment, as also investments into its stock markets. India has had favourable tax treaties with countries like Mauritius and Singapore, under which capital gains on sale of shares in India by investors situated in those nations, were tax exempt. It led to a rampant misuse of these benevolent provisions and these two countries became the most favoured conduit for channelizing investments into India, by global investors. It led to a sizeable loss of tax revenue for India resulting in amendment of the tax treaties with Mauritius and Singapore, denying them such a simpliciter special status. Transactions routed through tax havens continue to be a bane for India, as they facilitate money laundering/round tripping of funds and defeat India’s tax code. An imperative need was felt to thus tax those international transactions routed into India, which lacked commercial substance and were designed with the sole purpose of tax avoidance. It led to the formulation of the General Anti Avoidance Rules (GAAR). The GAAR rules are to kick in from April 2017 and despite the inbuilt safeguards and government assurances, they are perceived to be a draconian tool in the hands of the taxman, to arbitrarily reject any transaction or arrangement, alleging that it has been designed to avoid tax in India. The GAAR is an anti avoidance rule, that empowers the revenue authorities to deny the tax benefits of any transaction/arrangement, which in the taxman’s view do not have any commercial substance or consideration, other than to achieve tax benefit. It directly interferes with the rights of a tax payer to choose a method of implementing a transaction, including investments into India, global restructuring of companies, mergers and acquisitions and sale of goods, even if cleared by courts or other authorities, if the taxman thinks otherwise.
The impending onset of GAAR, has been a matter of concern to investors. To allay such fears, the CBDT, has given clarifications in its recent circular. The ET reports that in order to alleviate fears, of foreign investors, the government has issued a set of 16 clarifications on GAAR. The highlights of it are that GAAR will not be invoked if the tax treaty with a country has an anti avoidance rule, it will also not be invoked just because an investor is located in a tax efficient jurisdiction, it will not apply if an investor is not located in a place, just for tax reasons and it will also not apply to court sanctioned arrangements. The CBDT further clarifies that while tax payers are free to select their method of implementation, GAAR will also not apply to investments made before April 1, 2017. It however clarified that the adoption of anti abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies, but will be tackled through domestic anti tax avoidance rules.
While the government has sought to clarify/allay fears, the real softening of the GAAR rules will be for the foreign PE funds and foreign portfolio investors. It has not only provided a grand fathering clause for investments made prior to April, 2017, but also says that GAAR will not be invoked, if the jurisdiction of the FPI is finalised, based on non tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit. The clarification brought a sense of relief to some. A leading lawyer remarked that the clarification gives relief to pooling vehicles incorporated outside India, so long as they can substantiate that the choice of jurisdiction is not based on tax considerations. Tax experts termed the clarifications as credible and serious.
While the CBDT says that adequate procedural safeguards are in place to ensure that GAAR is invoked in a uniform, fair and rational manner and the Government is committed to provide certainty and clarity in tax rules, it yet fails to inspire confidence. The unbridled taxman is known to be arbitrary and cavalier in approach and is slow in implementing promises. Ask the likes of Vodafone and many others, who have suffered at the hands of the taxman, who fails to honour even court verdicts, through retro amendments.