Aggressive tax planning or tax avoidance has been a concern for the tax administrators the world over. While tax evasion is generally considered as criminal, it is not so in the case of tax avoidance. Nevertheless, both cause a drain on the revenue and shift the tax burden on the less well-off section of the society. Since resourceful taxpayers are miles ahead of the tax administration in India as elsewhere, normally, the recourse of the Revenue has been to prohibit the particular scheme that came to its notice. This has led to the enactment of specific anti abuse rules or SAAR. But in this cat and mouse game, the Revenue has always been the loser. Dave Hartnett of the HMRC has colorfully explained the phenomenon as one of squeezing the balloon in one area only to see a new bulge appearing in another. Revenue authorities in all important economies save the United States have therefore resorted to what is known as the General Anti Avoidance Rule or GAAR. The US IRS of course has other means to enforce its laws. In a very simple layman's language, GAAR is a rule that empowers the tax department to ignore the various schemes and ruses adopted by canny taxpayers, which but for these rules would have been within the boundaries of law. GAAR is therefore kind of a catchall provision.

In India, ever since the first undiluted and pristine Direct Taxes Code (DTC) proposed to introduce a General Anti Avoidance rule, the media, aided and abetted by the big accounting firms, has been opposing the proposal tooth and nail and has been on an overdrive in pointing out the ill effects of giving ‘draconian power' to the tax department.

But what did the provisions actually say? It was stipulated that in case a taxpayer entered into an arrangement with the primary motive of availing a tax benefit and the arrangement contained any of the following elements i.e. creating rights, obligations etc. which would not normally be created between persons dealing at arm's length, resulted in misuse or abuse of the Act or lacked commercial substance or was entered into in a manner not normally found in bonafide business transactions, then only the GAAR provisions would kick in and the Commissioner of Income Tax would be authorized to ignore the form of the transaction in favour of its substance and re-characterize the transaction. Since the taxpayer is in the best position to know his affairs, the burden was initially placed on the taxpayer to prove that the transaction concerned was not tax avoidant.

Following widespread criticism in the media and industry associations that the proposal would be misused, in the revised discussion draft on DTC, certain safeguards were provided. It was promised that the Central Board of Direct Taxes (CBDT) would issue guidelines about the circumstances in which GAAR could be invoked, that the affected taxpayer could approach the Dispute Resolution Panel (DRP). It was also promised that a threshold limit would be prescribed for invoking the GAAR.

In the DTC Bill that was finally introduced in the Parliament there was not much change from the above position. The matter was however examined by the Standing Committee, which received representations from IBA, ICAI, FICCI, and BCAS. After considering the representations and the replies of the Department, the Standing Committee made the following recommendations:

•  Since DRP is a purely departmental body it will be proper if a more independent body does the review. The assessing officer should record reasons before invoking GAAR.

•  A threshold limit may be prescribed, which can be reviewed with experience.

•  GAAR should be applied prospectively or grandfathering can be done.

•  Taxpayers should be allowed to approach the Authority for Advance Ruling (AAR) for ascertaining whether the transaction would fall within the GAAR

•  Since clause 123(1) of the DTC seems to suggest that while invoking GAAR provisions, the entire arrangement may be declared as ‘impermissible arrangement', it should be clarified that only that part of the arrangement would be invoked which is proved as impermissible

•  Uncertainties with regard to applicability of tax treaty provisions should be removed so that India's credibility as a reliable treaty partner is not affected.

•  It should be ensured that any of the proposals does not pave the way for avoidable litigation.

While some of the suggestions are entirely justified considering the ground realities of the tax administration in India, the exhortation that uncertainties relating to applicability of tax treaty provisions should be removed reminds me of a Bengali saying: “Dhori Macch, Nachhui Pani”- will catch fish without wetting the hands. Much as that is impossibility, the Revenue cannot also please the tax evaders taking the Mauritius/ Singapore/ Cyprus/UAE route to launder their black money in the name of foreign investment.

With the opposition parties crying from the roof top about the government not doing anything about tackling and bringing back black money stashed abroad, the Government introduced a slew of measures in the Finance Bill, 2012. Although it was decided to postpone the operation of the DTC to 2013 since the recommendations of the standing committee were yet to come in till the time of the Budget preparation, the Finance Ministry fast tracked the introduction of GAAR by incorporating provisions in this regard in the Budget, 2012. There was some change from the original DTC provisions. It was now provided that the GAAR provisions could be invoked only after approval from an approving panel of three Commissioners or Chief Commissioners.

Ever since, there has been an orchestrated campaign to paint all the ills of the Indian economy at the doors of this provision in the budget (along with the retroactive Vodafone tax amendments of course!). Smart news anchors would keep plugging away that the investments in India would dry up because of these tax measures. When it became clear that the Vodafone matter would die down, it was the GAAR, which was the villain of the piece. If these commentators are to be believed, it is because of the GAAR provisions that FIIs are not investing in India, it is because of GAAR that FDI is not coming to India, it is because of GAAR that there is capital flight from India, it is because of GAAR that current account deficit is high which in turn is putting pressure on the interest rate which in turn is responsible for the run away inflation. Conclusion- get rid of GAAR and milk and honey will flow again in our beautiful country- never mind the Greek crisis, the possible break up of the Euro zone or the negative effects of the telecom scam, the CWG scam, the mining scam or some other scam which is exploding on a daily basis. In the face of such carpet-bombing by the media, perhaps orchestrated by certain sections within the government itself, the Finance Ministry blinked and deferred its implementation by one year.

In an intervention, the then Finance Minister also made a statement in the Parliament relating to GAAR: “After examining the recommendations of the Standing Committee on GAAR provisions in the DTC Bill 2010, I propose to amend the GAAR provisions as follows:

1. Remove the onus of proof entirely from the taxpayer to the Revenue Department before any action can be initiated under GAAR.

2. Introduce an independent member in the GAAR approving panel to ensure objectivity and transparency. One member of the panel now would be an officer of the level of Joint Secretary or above from the Ministry of Law.

3. Provide that any taxpayer (resident or non-resident) can approach the Authority for Advance Ruling (AAR) for a ruling as to whether an arrangement to be undertaken by her is permissible or not under the GAAR provisions.

To provide greater clarity and certainty in the matters relating to GAAR, a Committee has been constituted under the Chairmanship of the Director General of Income Tax (International Taxation) to give recommendations for formulating the rules and guidelines for implementation of the GAAR provisions and to suggest safeguards so that these provisions are not applied indiscriminately. The Committee has already held several rounds of discussion with various stakeholders including the Foreign Institutional Investors. The Committee will submit its recommendations by 31st May 2012.”

Mr.Pranab Mukherjee, demitted office on the 26th June and the PM took charge of the Ministry. On 28th June, immediately after the Prime Minister's meeting with the officials, the Finance Ministry put up its guidelines in the matter of implementation of GAAR for public comments.

The committee has proposed a monetary threshold for invoking the provisions with the exact amount to be decided on the basis of the feedback received. It has proposed certain specific forms to be filled up to ensure that the principles of natural justice are not violated; it has also proposed time limits for actions to be taken at various stages. The committee, however, has turned down the request of the FIIs for completely exempting the capital market transactions from the GAAR; it also did not consider their plea for a flat tax. The committee however felt that a safe harbor could be provided to the FIIs subject to the payment of the domestic taxes. It is not clear whether this safe harbor would be specifically for the FIIs in addition to the general safe harbor that is proposed. There is already a special provision in the tax law for taxing the FIIs. The committee has held that if the FIIs chose to pay tax as per the domestic provisions, they will not be subject to any GAAR. However, if they operate through treaty countries, GAAR provisions might apply. It has however clarified that the provisions will not apply to the non-resident investors of the FIIs. In other words, the P-Note holders will not come under its ambit. It has also been clarified that the GAAR provisions will not be retrospective and will apply to income accruing after 1.4.2013. Clarification has also been issued that ‘connected person' will mean associated concerns, or relatives and persons covered u/s 40A. It has also been stipulated that where only a part of the arrangement is found impermissible, only that part will be considered as impermissible and not the whole arrangement. This takes care of the apprehensions of the Standing Committee. The guidelines state that tax mitigation by taking advantage of any fiscal incentive is not considered as avoidance. It further clarifies that the onus of proof is on the tax department.

The committee then gave some 21 examples specifying when GAAR can be invoked and when not. Some of the examples are to illustrate the point that when there are specific anti-avoidance provisions like CFC, Transfer Pricing, etc,. GAAR provisions will not apply. Examples 10 to 21 seem to be taken from the fact situation in respect of structures commonly adopted for aggressive tax planning and avoidance. Most of these examples relate to international taxation and such an emphasis may be due to the fact that the guidelines were meant to soothe the nerves of the foreign investors. Some of these are based on actual case laws. For instance, example no 10 is based on the fact situation in the case of Aditya Birla Nuvo (2011-TII-26-HC-MUM-INTL) where the Bombay High Court has held the arrangement to be a device. Example 11 seems to be from e-trade Mauritius = (2010-TII-20-ARA-INTL) where the AAR while acknowledging that the scheme could be for tax avoidance held in favour of the assessee in view of the Azadi decision (2003-TII-02-SC-INTL). Example 12 is based on the ruling of the AAR in in re A Mauritius (2012-TII-15-ARA-INTL). Example 18 again seems to be based on the AAR ruling in the Natwest Bank case [P No 9] (2002-TII-42-ARA-INTL).

Example 16 is the interpretation of the Limitation of Benefits clause in the India- Singapore treaty. In the Protocol, there is an expenditure limit of INR 50,00,000 in previous 24 months to prove the business substance test. The example states that if major part of the expenditure is for paying interest to the holding company outside Singapore, the same will not be taken into consideration.

From the point of view of the foreign investors, the most important example seems to be the one given in Illustration 3 which states as follows: “Facts: A foreign investor has invested in India through a low tax jurisdiction X. The holding company is doing business in the country of incorporation. i.e. X, has a Board of Directors that meets in that country and carries out business with adequate manpower, capital and infrastructure of its own and therefore, has substantial commercial substance in the said country X. Would GAAR would be invocbale or would the arrangement be permissible? Interpretation: In view of the factual substantive commercial substance or arrangement, Revenue would not invoke the GAAR provisions.” Looking at it from a different perspective, it seems that according to the Department, there must be adequate manpower, capital and own infrastructure in the low tax jurisdiction in absence of which the company will not be considered to have commercial substance and GAAR would accordingly apply in respect of transactions involving such a company.

The committee has done a good job in clarifying the stand of the Department. It may be said that some more examples could perhaps be given, particularly in relation to domestic transactions. It is hoped that the field officers will bring to the notice of the policy makers the common schemes that are noticed by them so that a view can be taken thereon.

As to whether the guidelines will satisfy the FIIs, I have my doubts. They have been allowed to have a stranglehold over the capital market and any attempt at taxing their profits or gains would be met with bouts of selling bringing down the all-important Sensex. When these FIIs or their apologists talk of certainty in taxation they mean no taxability. It is only through calling their bluff that the Government could salvage the situation. That is not going to happen particularly if one reads between the lines of the interview given by the Deputy Chairman of the Planning Commission to Karan Thapar in his ‘Devil's Advocate' Programme. “… the larger issue is the general tax avoidance rules, the GAAR rules, … I think they have caused a lot of uncertainty among the investors, the government actually recognised that by postponing the implementation of GAAR and what they said was that they are going to bring the draft guidelines which will reassure people and most importantly I think the government has said quite often that the FII should be reassured that it is not intended to make prejudicial change in their tax situation. My personal view is that's the correct thing to do. Now, the GAAR draft rule should reassure people, I believe two days ago they have circulated something at the official level, they invited feedback, these have been taken care of. I think the government should look carefully on informed opinion and informed comments on whether these rules take care of the problems that are creating difficulty and then address them.” (As per transcript available on the net)