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GAAR may be thrown open to public debate
May, 08th 2012

Chairman of BMR Advisors Mukesh Butani believes that the government will throw general anti-avoidance rules (GAAR) open to public debate during the one year extension that was announced by Finance Minister Pranab Mukherjee today. This makes a whole lot of sense because a substantive change in the law of this nature should be debated with the industry, he said.

Initially, the consensus was that GAAR will be implemented along with the direct taxes code (DTC), but Bhutani tells CNBC-TV18 that it will now come into effect in April 2013 whether DTC comes into effect or not.
He further adds that the panel set up to approve GAAR will contain one independent member by way of a joint secretary from Ministry Of Law. This is with a view to build some level of independence in the GAAR panel, he explained.
Below is an edited transcript of his interview with Siddharth Zarabi. Also watch the accompanying video.
Q: What is the impact of the change as far as the general anti-avoidance rules are concerned? What is the material change that he has announced today?

A: As you know, in the Finance Bill he had proposed that the general anti-avoidance would be applicable from 1st April 2012 and enabling provisions by way of subordinate legislation and rules will prescribe check and balances. So in absence of those rules and as a result of concern and fear, part of it was the fear of the unknown and part of it was how India will administer the GAAR legislation, there was nervousness.

Now most people believed that he should have ordinarily legislated GAAR in conjunction with the direct tax code provision. So if he has deferred the direct taxes code, he should have deferred the GAAR provision as well, which is what he seems to be doing now.

Q: The Finance Bill explanatory memorandum said April 1, 2013 but said assessment year 2012-13, which effectively meant that all transactions that are being done in the current financial year would have been covered ultimately.


Also, with the direct taxes code the concept of the assessment year will go away. What you are telling us is that now GAAR will come with the advent of the DTC, is that impression correct?
A: Absolutely. When you say that GAAR will be applicable from April 1, 2012, I mean that it will apply in the current year, that was what was the Finance Bill provision. In the Finance Bill, the word used is applicable from April 1, 2013 because that is with reference to assessment year. The financial year April 1, 2012 to March 31, 2013 is assessment year 2013-14, which means that from an income tax assessment year stand point, it is with effect from April 1, 2013.

That proposal seems to have been deferred. This proposal will now clearly apply from April 1, 2013, whether DTC comes into effect or does not come into effect. That would mean two things; one, that the subordinate legislation that would come out would be thoroughly debated. I have a feeling that the rules will be thrown open for public debate which makes a whole lot of sense because a substantive change in the law of this nature should be debated with the industry.
The second aspect that he has added is that the onus of proof would now be on the tax department. This was a recommendation of the Standing Committee on Parliament that he has announced today.
Q: That report actually came after the Budget?

A: No that report came few days before the Budget, but I would imagine that the Finance Bill provisions would have been finalized by then. The third important change that is brought about is that the panel which is going to eventually give a stamp of approval whether GAAR should be invoked or not will have one independent member by way of a joint secretary from Ministry Of Law. So in other words, you would not have all the members from the tax administration.

This is with a view to build some level of independence in the GAAR panel. So I think these are the three changes as was explained by way of a statement that the Finance Minister made in Parliament today.

Q: The Finance Minister also said that any tax payer can approach the authority for advance ruling to determine whether his arrangement is permissible under the GAAR provisions. Clearly, this is also something that is extremely significant?

A: It is significant, no doubt about it. Though the Finance Minister did not make a direct statement to this effect, the statements that are being issued or made available from Parliament seem to suggest that a transaction where GAAR can be classified as impermissible transaction, now you can test that transaction with the advance ruling authority.
So you now have an added layer of checks and balances built in. If a tax payer wants to seek a ruling, he can do that now by virtue of the amendment that you just read out.

Q: There was also an expectation that he would sort of bow to pressure as far as the retrospective amendments, which now is popularly called the Vodafone amendment, but he hasnt seeded any ground, has he?

A: There are various kinds of retrospective amendments. The amendments to tax Vodafone kind of transaction is just one amendment. There is no statement to that effect, so we will need to see how the bill gets debated in Parliament for the rest of the week and then see whether he moves an amendment to be able to withdraw that proposal or modify that proposal. But you are right, there has been no change in so far as other forms of retrospective amendments are concerned.

Q: What is your sense? Will there be some give and take on Vodafone outside of the legislative framework at least?

A: I need to be a crystal ball gazer to be able to answer that question. I would merely say that my take away from the first debate on the Finance Bill is that here is a Finance Minister who is willing to listen and absorb and take into consideration views and sentiments that are echoed by the industry.
I do not know whether this will apply to all kinds retrospective amendments, I hope it does to some forms of retrospective amendments, but we need to wait and see how this week goes by way of Parliamentary debate on the Finance Bill.

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