JOIN USGAAR, the acronym of the General Anti Avoidance Rules, sounds quite jarring and has remained quite an irritant for the foreign investors, ever since the proposal was mooted in 2012-13. The objective was to check tax evasion by clever foreign investors on their transactions in India. In a way, the GAAR was also in spirit of the increasing pressure by most of the developed and developing nations to work in a coordinated manner to deal with the sophisticated ways of tax avoidance by several cross-country entities which take advantage of loopholes in some tax jurisdictions. The GAAR had run into controversies both in the UPA and the NDA regimes. Whatever may be the pronouncements of the political masters, tax officials remain unchanged, notwithstanding the routine postings and transfers.
Finally, the Central Board of Direct Taxes (CBDT) has come out with clarifications which do not appear to be so much jarring, to most of the experts barring some grey areas which are unavoidable in any taxation regime. The new guidelines make it clear that the GAAR would be applicable from April 2017, which in the taxman’s language, would mean assessment year 2018-19. It is a welcome feature as there is no fear of any retrospective implementation, which had been the most troublesome part of the Indian tax administration. The GAAR empowers the tax department to scrutinise all such transactions by foreign investors structured in a manner to deliberately avoid taxes in India. But there were concerns whether the rules could override the double taxation avoidance treaties with several countries.
The government has made it clear that the rules would not be applicable in cases where the investment is routed through treaties which have Limitation of Benefit (LOB) clause built in. The LOB is a kind of safeguard to ensure that only the genuine firms benefit from the double tax avoidance treaties. Besides, it is clarified that the GAAR would not apply on compulsorily convertible instruments, bonus issuances or split/consolidation of holdings with regard to investments made before April 2017.
While several pathbreaking economic reforms have been initiated by successive governments, India has not really earned enough goodwill among foreign investors for a stable, predictable and clear tax laws which carry a lot of grey areas, leaving scope for discretion and misuse. The Vodafone case is still not settled even as a recent CBDT circular on multiple tax points was kept in abeyance after a hue and cry by foreign portfolio investors. If misuse has to stop, discretion should be eliminated.