New Delhi: Introduction of the General Anti-Avoidance Rules (GAAR) at this critical juncture would further dent the investments globally and therefore, the government should withdraw the move and conduct a study to analyse the post-benefit advantages, apex industry body ASSOCHAM said today.
“We should not give room to uncertainty and if we do not wish to honour the stipulations in the treaties entered with Mauritius and Singapore we should clearly come out of the policy,” said Mr Rajkumar Dhoot, president of The Associated Chambers of Commerce and Industry of India (ASSOCHAM) while addressing a press conference along with Mr Ved Jain, chairperson, ASSOCHAM Direct Tax Committee and Mr D.S. Rawat, secretary general of the chamber.
The chamber strongly reiterated its stand on GAAR and said it is not acceptable in the present form as it has not been able to address the apprehensions and expectations of larger stake owners both at home and abroad.
"Our plans to open up FDI in several sectors will face fire wall if the present form and intent is not fully addressed for a clearer and positive intent," cautioned Mr Dhoot.
"This is the time to restore the fading industrial confidence and encourage larger investments both by the foreign entrepreneurs and domestic business houses," said the ASSOCHAM chief.
A meeting of the ASSOCHAM Team on GAAR, with the PM appointed Expert Committee on GAAR, headed by Dr Parthasarthy Shome, was well received and on a positive note several suggestions were taken appreciated. It included interalia the following suggestions/ views:
1. International investor is looking for certainty in tax laws. Recent
tax decisions such as GAAR and amendment and that too with retrospective effect have seriously affected the economy of the country. Revenue should not be the prime and sole consideration.
2. Growth of the economy should be the main driving force. Growth in the economy brings growth in revenue for the authorities.
3. The last decade where collection on account of direct taxes have grown by ten times (from just around Rs 50,000 Crs to more than Rs. 500,000 Crs. This has been the result of continued focus of government to attract investments inflows with tax clarity and equal treatment to investors, both at home and abroad. Any such reform that hits growth will be injurious to the economy.
4. ASSOCHAM is of the view that the recent steps to introduce GAAR; amendment to Section 9 may apparently look to be attractive for the initial growth but in reality have caused a much larger harm to the economy with the result that revenue collection itself will get adversely affected substantially. Accordingly ASSOCHAM is of the view that GAAR be postponed for at least for another five years.
5. Retrospective amendment be withdrawn and the issue of indirect transfer be clarified so as it does not capture and clarifies each and every transfer as to give certainty to investors about its liability.
6. The Consultative committee needs to have adequate Industry representation to target the grey areas and supplement facilitation in areas that have inconsistency and hazy Tax perception. Such representation should be an expert /professional drawn from the Industry.
7. The enormous discretions given to the tax authorities regarding permissibility of a transaction/ intent and several unclear interpretations needs to be capped and specified to isolate uncertainty. Larger stakeholder discussions needs to weed out and address apprehensions and fear that has put on hold several M&A transactions and prompted several real time inbound investments out of Indian economy radar.
8. GAAR needs to put in place the following terms for standardized interpretation as well as easy and undisputed comprehension:
a) Positive definition of “Commercial substance”
The definition of “arrangement to lack commercial substance” has been given under section 97 of the Act. However no definition has been proposed under the Act or the Guidelines to define an “arrangement that fulfils commercial substance” criterion. A positive definition, therefore, is necessary to bring in the element of certainty from the taxpayer’s perspective.
b) Withholding Tax
In case the provision of GAAR has been invoked and the income is re-charectarize (for e.g. Capital Gain into Dividend), issue may arise as to whether the Payer could be held liable for non-deduction of tax and consequently be liable for interest and penalty under the Act as an outcome of such re-characterization.
c) Main Purpose or One of the Main Purposes to obtain Tax Benefit Test
No Resolution offered in the Draft Guideline on this contentious issue. Initially DTC had the criterion as ‘Main or the Sole Purpose’ basis. Even the RSA GAAR has ‘Main or Sole Purpose’ as the key test.
This may lead transaction / a full series of transactions to fall into / within GAAR even without any Actual Realization / Accrual of Tax Benefit.
d) Prescription of Time Limits - from Invocation to Completion of GAAR
Time limits for completion of assessment under GAAR not defined. Delay in GAAR Assessments resulting in continuity of default on part of the taxpayer, if eventually decided against him/her, leading to avoidable financial burden.
e) Treaty Over-ride
An important part of certainty is respecting the obligations imposed by double taxation agreements between treaty partners. It is apprehended that the application of the GAAR rules in the given manner would constitute an impermissible unilateral amendment.
f) Interplay between Specific Anti-Avoidance Rules (SAAR) and GAAR
It has been proposed in the Draft Guidelines that SAAR would (i.e. Transfer Pricing, dividend stripping etc.) prevail over GAAR. However in exceptional circumstances GAAR to prevail over SAAR. Ambiguity still arises on the illustrations given under guidelines on exceptional circumstances in which GAAR will prevail over SAAR.
Absence of clarity with exactness; coupled with the sensitivity around GAAR may only lead to further avoidable litigations at taxpayer’s cost.
g) Role clarity of Approving Panel
Guidelines do not clarify the role of a three-member panel, whose approval is necessary for the tax administration to proceed with a GAAR case. Guidelines do not clarify the role of a three-member panel, whose approval is necessary for the tax administration to proceed with a GAAR case. Adequate industry representation is essential to address the challenges faced by the Industry.
h) Prospective operation of GAAR
It is clarified that the provisions of GAAR will apply to the income accruing or arising to taxpayers on or after 1st April 2013. However, the guidelines do not provide grandfather of existing investments/ structures set up in the pre-GAAR regime.
i) Meaning of Tax Avoidance
Under the proposed GAAR Guidelines, the definition of Tax Mitigation and Tax Evasion has been given. However the draft Guidelines does not provide for the definition of Tax Avoidance. Absence of one of this most critical term of GAAR would only result in undue hardness to the taxpayers and add to unwarranted powers of the tax administration.
j) GAAR does not define the terms ‘Direct or Indirect’; ‘Misuse or Abuse’; ‘Bonafide purpose’; ‘Commercial Substance’; ‘Main Purpose’ ‘one of the Main Purposes’ leaving the Taxpayer puzzled. All terms critical to the application of GAAR require due clarity
k) The definition of ‘Tax Benefits’ in itself is very wide; and it must be understood that Tax is a cost and it is also settled by the Judiciary and accepted by the Revenue through its Circulars that an Assessee is allowed to plan his affairs in most beneficial manner. An Assessee should therefore be allowed to plan his affairs in most cost-effective and beneficial manner. This position of the Assessee needs to be protected in the Draft Guidelines.
“Considering that any move to enforce archaic tax structures are bound to damage sentiments for a longer period, therefore there is a strong case for taking a review/revisit to the GAAR rules as it has done more damage than benefit to the economy,” said Mr Ved Jain, chairman of ASSOCHAM Direct Tax Committee.
“The economy is passing through one of the challenged phases and time is not ripe to introduce such onerous, unclear and wider interpretational reforms which have already deterred investments and capital inflows,” said Mr Jain.
“On one side the country is facing with serious capital deficit, such overambitious and regressive tax introduction will leave a long lasting negative impact on the economy,” said Mr D.S. Rawat, secretary general of ASSOCHAM.
“ASSOCHAM welcomes GAAR but not in the present form. GAAR must encourage capital inflows and encourage inbound as well as outbound trade and investment,” said Mr Rawat. “A larger stake holder consultation as has been done by the Dr. Shome committee is a very positive and encouraging exercise which is bound to remove several hurdles in the present GAAR structure and bring progressive, revenue positive and investor friendly environment for this economy that plans double digit growth.”