Shome Committee's recommendations, a welcome shift on GAAR
September, 04th 2012
The Shome Committee Report seeks to address a number of concerns on general anti-avoidance rules (GAAR) and, thereby, mitigate the negative publicity India had received on this count. GAAR, initially sought to be introduced vide the Direct Taxes Code, was introduced a year early - as a possible response to some of the observations of the Supreme Court in the Vodafone case - the implementation was then deferred by a year as a result of all the negative publicity it got. Then, the Shome Committee was set up to hear the stakeholders and the committee has now recommended pushing implementation back by three years.
GAAR was introduced alongside the retrospective amendment of S9 seeking to tax overseas transfer of assets with underlying value in India. Together, they raised the fear that India has an aggressive tax administration that results in a proliferation of litigation; litigation is time-consuming; and, at the end of it if one succeeds, the law could be amended retrospectively.
The Shome Committee Report should be viewed as a first, but very important, step in the bridging of the trust deficit. The report, prepared after an extensive round of consultations, addresses several key issues:
It recognises the need for a consultative process and a buy-in of the key stakeholders, something that was absent when the provisions were introduced. Similar provisions introduced elsewhere in the world were after extensive deliberations.
It addresses a key issue of a need for transition. The report recommends grandfathering of the income arising from investments made prior to the GAAR regime as being covered by the earlier regime. The three-year deferment should be viewed in this light. It provides a window of opportunity to taxpayers to prepare and brace themselves for the new regime and to the tax regime to get trained to implement it.
It recognises the need to respect tax treaties; we have a right to review and renegotiate tax treaties but bypassing them through domestic legislation is not an appropriate way forward.
It brings out the important distinction between tax planning arising through legitimate choices available under the provisions of law and tax avoidance by resorting to circuitous transactions that have no commercial value and are only tax-driven.
It appreciates that choices made in real life are driven by commercial people; revenue, sitting in hindsight, needs to understand the commercial aspects and cannot impute tax avoidance. The recommendation of a five-member approving panel, including industry/professional representation, is a welcome, path-breaking one. It will considerably address the issue of trust deficit.
It provides examples of when GAAR will apply and when not and the consequences thereof. This will provide a basis of understanding and interpretation of various subjective terms and mitigate the vagaries of the subjectivity. Given that business realities and forms of transaction keep on changing, the list of illustrations will need to be updated on an ongoing basis.