DR Shome in his Report laments that India, in coming up with the GAAR provisions, has veered away from the path shown by her colonial masters. To quote from the report: “…At the outset, therefore, it may be helpful to note an ongoing international process to introduce a GAAR, that of the UK. To put the matter in context, one should not refrain from recognizing that India has closely followed UK‘s principles and judicial pronouncements on such issues for a century while taking a different view wherever appropriate. However, India‘s 2012 GAAR draft guidelines cannot be said to have resembled UK‘s GAAR process ….”
The Shome committee then tells us that there was a wide consultation process in the UK at the end of which the outcome of UK's consultation process has been to opt for a model that will be applied only in exceptional cases where there is clear evidence of an extremely aggressive arrangement to escape tax. In contrast,says the committee, there was not much consultation in India and that the Indian GAAR came to be associated with the retrospective Voda amendments which earned worldwide opprobrium giving an impression that India is not a good place to do business with. Therefore, the committee came up with certain proposals to further dilute the provisions as contained in the Finance Act.
It is not very clear what the committee is exactly finding fault with. As for the formulation of the proposal, the same was done under the aegis of the current Finance Minister. True, it was not the result of the deliberations of any committee headed by a jurist or the like. But that flaw attaches to the entire DTC and not just the proposal relating to the GAAR. The consultation process in India might not have been similar to that of the UK but there has been consultation including in the Standing Committee as we have seen in the last episode. As for the content, it is also a fact that many in the UK itself find their version to be diluted and toothless. There are also others of the laissez-faire variety who think that even this diluted provision may not be good for business in the UK. Depending upon the predilections of each, one can take a position one-way or the other. The fact however remains that both the jurisdictions thought that GAAR was a necessity in the present circumstances. There are, however, various other factors that need to be considered before commenting on the desirability of one approach or the other- whether to have a catch –all provision or to have a provision targeted towards what is called ‘egregious' tax evasion. It is true that Mr. Aaronson, QC heading the UK GAAR committee chose the latter. However, the legal, economic and judicial aspects prevailing in the respective jurisdictions need also to be considered.
When we are comparing ourselves with the UK, let us recognize the fact that our approach to tax avoidance thus far has been rather mild. The UK, even without a GAAR, relies on three aspects to deal with an avoidant structure- a robust judicial anti avoidance doctrine propounded by the Courts, a set of targeted anti-avoidance rule (TAAR) and a regime of disclosure of tax-avoidance schemes (DOTAs) in force since 2006.
The Targeted Anti-avoidance Rules or TAARs are the response of the tax administration to any avoidance scheme that comes to its notice. This is the same as what we call here the Specific anti abuse rule or (SAAR). But as mentioned earlier, our response to various abusive schemes has been rather benign. We have a limited number of SAARs in the Income Tax Act. The Shome committee itself mentions only 10 provisions [in Annexure 5 to the report] besides talking about LOB clauses in the tax treaties as some kind of SAAR. Compare this with the UK response. The Aaronson report mentions that there are now altogether about 300 TAARs in the UK. Some of them are quite elaborate and complex. The report gives the example of dealing with disguised remuneration, which is stated to take up more than 68 pages of the statute book. In fact, reports suggest that it is because of the TAARs that the according to Lexis Nexis, the UK tax code is now the longest and most complex tax code in the world. The Tolley's Tax Guide is stated to be 11,520 pages long . Those constantly cribbing about the complexity of the Indian tax code should better take note.
As for DOTAS, the legislation requires early disclosure to the HMRC of tax avoidant arrangements that satisfy certain prescribed hallmarks. HMRC can then evaluate the scheme and amend the relevant legislation to block the same. Compare this with what happens in India. When the tax administration discovers rampant misuse of companies registered in Mauritius, the CBDT is forced to issue a circular asking its officers to look the other way. Therefore, the touching faith of the committee in following the UK example of dealing with tax avoidance is rather naïve. It is also unfortunate that the Shome committee should, in fact, recommend the perpetuation of the said circular.
Next, we come to the third prong of the arsenal available to the Revenue- the judicial anti-avoidance rules. The rule started in the UK with the formulation by the judiciary of the so-called Ramsay doctrine, which challenged the laissez-faire doctrine of Westminster- any body is entitled to so arrange his affairs to pay the least amount of tax. In fact, the Aaronson report itself mentions in Para.3.12 as follows: “By using purposive interpretation, and looking beyond the literal language of the particular provisions to seek the true meaning from their wider context, the Courts have frustrated many attempts which, pre Ramsay, would have succeeded.”
Let us compare this with the situation prevailing in India. It was by following the Ramsay doctrine that a five judge Bench of the Supreme Court decided the famous McDowell case (2002-TII-59-SC-CB-MISC). In his concurring judgement, Justice Chinnappa Reddy examined the subject of tax avoidance and the judicial attitude in the UK till that time and observed: “Thus the ghost of Westminster (in the words of Lord Roskill) has been exorcised in England. Should it be allowed to rear its head in India?” And further: “I have referred to the English cases at some length, only to show that in the very country of its birth, the principle of Westminster has been given a decent burial and in that very country where the phrase ‘tax avoidance' originated the judicial attitude towards tax avoidance has changed and the smile, cynical or even affectionate though it might have been at one time, has now frozen into a deep frown. The Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it.”
The following observation of justice Reddy is again very apt in the context of our discussion: “It is neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to deter-mine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of ‘emerging' techniques of interpretation as was done in Ramsay, Burma Oil and Dawson, to expose the devices for what they really are and to refuse to give judicial benediction . . ."
Had this state of affairs continued, one could perhaps have rightfully argued that there is no immediate need of a GAAR in India.
Unfortunately, however, the Supreme Court did a complete U-turn when the matter of tax avoidance was again argued before it in the infamous Azadi Bachao case. This time the Court held: “It thus appears to us that not only is the principle in Duke of Westminster's case (1936) AC1 (HL); 19 TC 490 alive and kicking in England, but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell's case.” The Supreme Court thus termed the verdict given by a five member Bench as a temporary turbulence, meaning thereby that the laissez-faire attitude in matters of tax avoidance would continue. In fact, in the recent Vodafone case, the issue was raised again before the Supreme Court. However, the court again took the view that the other judges did not share the observations of Justice Reddy in the McDowell case. In fact, Justice Radhakrishnanan who delivered the concurring judgement was of the opinion that the British courts have 'killed off' the Ramsay doctrine. (See Vodafone Part II - Pay No Taxes - Treaty-shop, Invest & Go!)
These then are the factual differences between the situation in India when compared with the UK - the UK has a much more robust TAAR, it has a provision for disclosure of avoidance schemes and it has a robust judicial anti- avoidance rule. In comparison, it takes a lot of political will to plug loopholes through SAARs in India and consequently, these are far fewer in number. India has no disclosure rules and Indian Courts so far has been, to borrow the words of Justice Chinnappa Reddy, smiling benevolently' at tax avoidance.
Even if, for the sake of argument, it is assumed that overall, the UK has a more benign anti-avoidance regime as compared to India, one disturbing aspect of the recommendation of the Shome Committee that has the potential to substantially negate the very purpose of a GAAR needs to be highlighted. It has been suggested that GAAR should be invoked only if the sole object of the scheme is tax avoidance. Section 96 (1) of the Act defines an impermissible arrangement as follows: An impermissible avoidance arrangement means an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and …
In this context, the Shome committee states as follows: “It has been pointed out by stakeholders that the original version of GAAR in DTC 2009 and DTC 2010, the purpose test required that the main purpose of the arrangement was to obtain tax benefit. However, the GAAR provisions introduced through Finance Act, 2012 provides for - main purpose or one of the main purposes is to obtain tax benefit". Though initially only those arrangements were covered under GAAR where the most predominant purpose was to obtain tax benefit this has been diluted in the recent version of GAAR as there could be many dominant purposes of an arrangement and to obtain tax benefit is one of such purposes Then also GAAR can be invoked even if obtaining tax benefit is not the most predominant or the sole purpose of the arrangement. It was suggested that the provisions as per original DTC 2009 may be restored so that only the arrangements which have the main purpose or the most dominant purpose to obtain tax benefit should be covered under GAAR.
“In view of the above, the Committee recommends that the Act may be amended to provide that only arrangements which have the main purpose (and not one of the main purposes) of obtaining tax benefit should be covered under GAAR.”
The Shome Committee apparently has looked into the best practices in regard to GAAR before submitting its report. In fact, it gives a summary in Annexure -4, which includes the Aaronson draft. The relevant provision in the Aaronson draft reads as follows:
“For the purposes of this Part an abnormal arrangement is contrived to achieve an abusive tax result if, and only if, the inclusion of any abnormal feature (see sections 6 and 7) can reasonably be considered to have as its sole purpose, or as one of its main purposes, the achievement of an abusive tax result…”
And the provision as suggested by HMRC in the discussion draft that has been put up for public discussion is as follows:
“Arrangements are “tax arrangements” if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.”
It is not known why the committee did not look into the Aaronson draft or the proposed draft put up by HMRC as consultation document before making its recommendations. The committee very conveniently forgets that in the original DTC provision (2009), the burden of proof was on the taxpayer to prove that there was no avoidance scheme. In that scheme of things, it could perhaps be insisted that the main purpose should be obtaining a tax benefit. However, that scheme of things has changed and the burden of proof is now on the Revenue. In such changed circumstances, the committee now wants to insist that the department proves that the sole object of an arrangement entered into by the taxpayer is to obtain a tax benefit.
We end this part of the discussion by pointing out another recommendation, which apart are from being not founded on reason is capable of doing immense harm to any serious effort to tackle tax avoidance. The Shome Committee in Para. 3.19 of its report mentions: “Considering the concerns that there could be interplay between Specific Anti Avoidance Rules (SAAR) and GAAR, stakeholders submitted that many countries do not apply GAAR where SAAR is applicable. It was, therefore, suggested that the guidelines should clearly state this and, in case SAAR is misused, then it should be amended to make that particular SAAR more robust.” The committee then says that the following clarification issued by the Director General International Taxation earlier, has come in for severe criticism. ”While SAARs are promulgated to counter a specific abusive behavior, GAARs are used to support SAARs and to cover transactions that are not covered by SAARs. Under normal circumstances, where specific SAAR is applicable, GAAR will not be invoked. However, in an exceptional case of abusive behavior on the part of a taxpayer that might defeat a SAAR, as illustrated in Example No. 16 in Annexure E (or similar cases), GAAR could also be invoked.”
Therefore, the committee recommends that wherever SAAR is applicable, GAAR should not be applied. The Committee then equates SAARs with LOB clauses in tax treaties in an effort to carve out special treatment for Mauritius and Singapore et al so that treaty shopping, the worst form of tax avoidance, may continue forever. But, what is the reasoning given by the committee? “It is a settled principle that, where a specific rule is available, a general rule will not apply. SAAR normally covers a specific aspect or situation of tax avoidance and provides a specific rule to deal with specific tax avoidance schemes. For instance, transfer pricing regulation in respect of transactions between associated enterprises ensures determination of taxable income based on arm‘s length price of such transactions. Here GAAR cannot be applied if such transactions between associated enterprises are not at arm‘s length even though one of the tainted elements of GAAR refers to dealings not at arm‘s length.”
Thus, the reasoning given by the committee for making the recommendation is that the ‘stakeholders' have said that many countries do not apply GAAR where SAAR is applicable and that they had complained about a clarification given by the DG without specifying the countries, the systems and such other relevant details which would make it possible to make a meaningful comparison. But leaving aside other countries, since the committee was concerned by our deviation from the UK system, let us see what the UK tax administration has to say in the matter. In the discussion document put up by HMRC,under the title ‘Impact of GAAR on other anti-avoidance measures' in Para. 2.5, it is mentioned:
“The GAAR will be one strand in HMRC's approach to tackling avoidance. It will not affect HMRC's right or ability to challenge in the normal way arrangements which it considers ineffective in achieving a tax avoidance purpose. If arrangements do not fall within the GAAR, they may still be regarded as avoidance. HMRC will challenge and, where it can, counteract all forms of tax avoidance:
• using the GAAR, where it applies, as an additional tool alongside existing anti avoidance tools; and
• using existing anti-avoidance tools where the GAAR does not apply”.
The reasoning for the stand of the HMRC is given in Para 2.9 as follows:
“TAARs are still likely to be required, particularly until such time as the GAAR has proved to be effective in countering artificial and abusive avoidance schemes. It is also important to note that TAARs apply to a wide range of tax avoidance, including tax avoidance which would not be considered to be at the “abusive” end of the spectrum of tax avoidance that is the intended target of the GAAR. The need for TAARs is therefore likely to remain, although the existence of a GAAR may obviate the need for some TAARs and enable others to be simpler and more clearly focused.” Putting the same in the Indian context, one can say that if GAAR proves effective, the need for SAARs may be reconsidered but it is not the same thing as saying that where there is SAAR, GAAR will not apply.
Also See - Shome GAAR - The Deferment; It Pays To Be Foreign in India |
