GAAR…A Blessing or a Curse???

Author : Vaibhav Jha

Wehave been hearing a lot about Vodafone winning the case, GAAR, worryinginvestors, and recently Mauritius coming into picture. So, let’s analyze whatthis GAAR is all about?

GAAR?

• General Anti Avoidance Rule (GAAR) is a concept which gives powers to the TAX bodies and revenue authorities to deny tax benefits to those who do not have any other consideration other than acquiring tax benefits. Eventually it leads to several conflicts between the taxpayers and the TAX authorities. In lieu of this, principles regarding what constitutes an impermissible tax avoiding mechanism have been laid down by courts of various countries. With the increasing cross border transactions, countries have established authorities which have the powers to question the transactions and disregard the benefits enjoyed by the parties involved. Mature economies like New Zealand, Germany, France, and Canada have already have this mechanism in place. Australia is the first country to have this dedicated authority at place. With the Phenomenal growth of the world economy in the last decade of the developing economies, even they are going for GAAR
• The GAAR continues to be the most complex and controversial tax regime for all stakeholders.
• The GAAR need to be introduced for several reasons. Foremost is the fact that it will strengthen the tax integrity of any country. This in turn implies that the existing TAX laws were not adequate to deal with the tax issues. These judgements question the current ability of the laws to deal with such issues. 
• The requirement of GAAR should shape its fxpayers and also the relationship between the parties concerned. So, it should be enactorm and administration. When applied, it would have draconian consequences on the Taed carefully to target the real mischief only and no further

How the GAAR was born in India?

• With the Supreme Court’s decision on the Vodafone Tax Case going in the company’s favor, the Government fumed over losing the battle of $2.2 billion. Vodafone won the battle on the grounds that the deal (between Vodafone and Hutchison) was between two foreign countries and so it fell outside the Indian territorial tax jurisdiction. This led the Tax authorities to take a hard look at the provisions of Finance Bill. As a consequence, the new union budget amended the tax laws and gave the Taxmen powers to scrutinize offshore mergers and acquisition deals. This led to the birth of GAAR.
• GAAR or General Anti Avoidance Rule aims to target tax evaders, partly by stopping Indian corporate and investors from routing investments through Mauritius and other tax havens for the sole purpose of evading taxes. 

    

Vodafone-Hutchison Tax Case 

• Vodafone was entangled in the $2.5 billion tax dispute with the Indian Tax authorities. The Tax department alleged that the purchase of Hutchison Essar Telecom services involved purchase of assets of an Indian company and therefore Vodafone was liable to be taxed for the transaction.
• Vodafone maintained that it is not liable to pay any tax and even if liable, Hutchison India Ltd. would be responsible for the dues.
• In January 2012, the Supreme Court of India passed the judgement in favour of Vodafone based on the fact that the deal was between two companies (Vodafone and the subsidiary based in Netherlands) incorporated outside India.
• This led the Indian Tax authorities to make amendments to the existing Tax laws and charge Vodafone with   20000 crore. The second phase of the dispute is yet to begin.

Implications of GAAR

• The ambiguous nature of the rule, lack of clarity, and the sudden onset of provisions have been among the factors that have upset the investors.
• India has DTAA(Double Tax Avoidance Agreement) with Mauritius. So many FIIs take the Mauritius route to invest in India to avoid the tax. As per the GAAR, most of the FDI and FII flowing in through Mauritius would be taxable under the new law.
• The provisions made under GAAR are still ambiguous but may impact many companies. This has led to negative sentiments in the environment. Foreign institutional investors, which were the net buyers in the initial months of 2012, are now being the sellers as there is still high uncertainty about their investments.
• Further, under the provisions of GAAR no clear definition of commercial substance has been provided which further gives unrestricted powers to the tax authorities to interpret the term, resulting into a losing situation for the tax payers.

       

 Recent Developments

• With Mr. Manmohan Singh taking charge of the Finance Ministry, he created a four member committee to look into the concerns of the investors regarding GAAR. The complete guidelines would be finalized by September. This has allayed the fear of investors’ up to a large extent.
• The Committee's Terms of Reference include receiving comments from stakeholders and general public on the draft guidelines already published by the government on its website.
• If Indian corporates hopes that the newly formed committee will water down the rules that led to the furor and anxiety amongst the investors. We also hope the same.

Final Verdict

• There are many hidden intricacies which need to be studied before formulating GAAR. Nonetheless, it is important to have a clear notion of why GAAR is important? Not all the countries have them and even the existing GAARs vary widely. There is no predefined norm for GAAR and no need for one. Either way, the TAX laws should be efficient enough to deal with all the issues pertaining to cross border deals and transactions.