COMMENTARY

Lightening the Burden of GAAR

Sukumar Mukhopadhyay

The modications to the General Anti-Avoidance Rules proposed by the Shome Committee are largely reasonable. The only point that is hard to agree with is the suggestion that the implementation of the rules be put off for three years.

Sukumar Mukhopadhyay (smukher2000@ yahoo.com) is a former member of the Central Board of Excise and Customs.
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any stakeholders canvassed against the rigour of the proposed General Anti-Avoidance Rules (GAAR), which were to be implemented from next year (2013-14). It led the prime minister to constitute an expert committee headed by Parthasarathi Shome on 17 July 2012 to nalise the guidelines and a road map for implementation of GAAR taking into account the reactions of stakeholders. The committees report was submitted on 1 September 2012. This article revisits the issue and examines if the modications to GAAR suggested by the Shome Committee report are in excess of what is required. In other words, it considers whether the committee capitulated to the din created by stakeholders, who were spokesperson of industries that take advantage of loopholes in the income tax law and resort to what they call tax planning. The committees report begins by saying that the investment climate has been adversely affected by the combined effect of GAAR and retrospective taxation proposed in the budget for 2012-13. Foreign investors perceive the tax administration as having an unpredictable approach, it says. A comparison is made with the proposed GAAR in the UK, a country that has been a model for Indian tax laws. In the UK, an independent body of experts mooted the proposal after approximately four years of consultation, while in India
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the GAAR guidelines were formulated by a departmental committee. The approach in the introduction indicates that the report will tone down the impact of the proposed GAAR. While there is no harm in toning down harsh proposals, it is not necessary that the UKs example of taking a long time to introduce GAAR be followed. As a matter of fact, in scal matters, India now follows precedents in other systems such as those in Canada, Australia and the US, and even in South Africa and China. In all these countries, the target of anti-evasion rules is not just any attempt to evade tax, but transactions that result in a tax benet, unless they are carried out for bona de purposes and do not misuse the provisions of the law. The US follows the economic substance doctrine, which is a good example for India. The examples of many countries are in effect the same if a transaction has no economic substance and it is only for tax benet, it comes under the purview of GAAR. India has an advantage in being a late starter. The Shome Committee has agreed with stakeholders that GAAR should not be a broad spectrum instrument, but focus on abusive, contrived and articial arrangements. This is unexceptionable. Impermissible Avoidance Arrangement: An important discussion is on the wording of Section 96 (1), which is crucial to the existing GAAR. The section is as follows.
96 (1) An impermissible avoidance arrangement means an arrangement the main purpose or one of the main purposes of which is to obtain tax benet and it

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(a) creates rights and obligations which are not normally created between parties dealing at arms length; (b) results in misuse or abuse of provisions of this Act; (c) lacks commercial substance (separately dened in a subsequent paragraph) and is deemed to lack commercial substance under section 97, in whole or in part; or (d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona de purpose.

logical and reasonable. Introducing a denition and watering down the rigour of Section 97 will smooth out the concept of lack of commercial substance. Concepts of Tax Benet and Connected Person: The Shome Committee has pointed out that Section 99 has the concept of tax benet, which includes such benet to any person who is connected directly or indirectly to another person, and includes associated person. Stakeholders were concerned that the denition was too broad and ambiguous. The committee has recommended that the denition of connected person be restricted to associated person under Section 102 and associated enterprise under Section 92A. This is quite reasonable as it brings clarity to the concept and consolidates the concept of associated person with associated enterprise. Advance Ruling: A desirable amendment of the provisions for obtaining rulings from the Authority for Advance Ruling (AAR) has been made in the Finance Act 2012. This enables any resident or non-resident to approach the AAR for a ruling on whether an arrangement that is going to be undertaken by him or her is impermissible or not. While appreciating this, the committee has taken note of the opinions of stakeholders, which point out that though the advance ruling is supposed to be delivered in six months, the reality is that there is always a delay. It has recommended strengthening the AAR so that rulings are delivered in six months. Negative List of Cases Where GAAR Should Not Be Invoked: This is a bright idea and in line with the negative list of the comprehensive service tax that was introduced a short while ago. The negative list will be an illustrative list and not exhaustive. Some of the transactions suggested are the following (a) buyback of shares by a company; (b) setting up of a branch or subsidiary; (c) setting up of a unit in an SEZ; (d) funding through debt or equity; (e) purchase or lease of capital asset; (f) timing of a transaction, for instance, sale of property in loss while having prot in other transactions;
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The four provisions above are called the purpose test or the tainted element test. Stakeholders pointed out to the Shome Committee that the original version of GAAR in the Direct Taxes Code (DTC) 2009 and DTC 2010 required that the main purpose of the arrangement should be to obtain tax benet, while the GAAR provisions introduced in the Finance Act, 2012 say that the main purpose or one of the main purposes is to obtain tax benet. It was suggested that the original DTC proposal be restored, retaining main purpose, and not one of the main purposes. This was a very reasonable request and the Shome Committee has accepted it. The committee has further recommended that where only a part of the arrangement is impermissible, the tax consequences will be limited to that portion of the arrangement. This will remove one of the most serious hindrances to introducing GAAR and make it more acceptable to investing companies. Arrangement Lacking Commercial Substance: Section 96 (c) talks of lack of commercial substance, which has not been dened in Section 97, but it enumerates some circumstances relevant to this. The committee has recommended a generic denition of this concept, which was there in the DTC Bill 2009 but was omitted in the Finance Bill 2009 and 2010. It is,
An arrangement shall be deemed to be lacking commercial substance if it does not have a signicant effect upon the business risks, or net cash ows, of any party to the arrangement apart from any effect attributable to the tax benet that would be obtained but for the provisions of section.

(g) amalgamation and demergers as dened by a high court; (h) intra-group transactions that may result in tax benet to one person, without affecting overall tax revenue either by actual loss of revenue or deferral of revenue; and (i) examples of typical and illustrative cases given in the report. The list of illustrative cases is a great improvement in the structure of GAAR and it should work properly. The negative list is an original contribution of the committee. Treaty Override: Stakeholders claimed that a case covered by a tax treaty should not face the wrath of GAAR. The committee has observed that it is an internationally accepted principle of interpretation that in case of conict between a tax treaty and domestic law, whatever is more benecial to the taxpayer will be applicable. This principle has also been codied in Section 90 of the Income Tax Act. However, to provide certainty to the issue, Section 90 has been amended to specically provide for a treaty override in case GAAR is applicable. But some treaties have special anti-avoidance rules. The committee has recommended that GAAR should not apply in such cases. This can be made clear in the law for the sake of clarity. This suggestion is unexceptionable. Grandfathering Existing Investment and Not Structures of Investment: Stakeholders pointed out that GAAR should not be applied retrospectively. If it is implemented from 2013-14, it should apply to income accruing in 201314, the assessment year being 2014-15, and to subsequent years. The committee agreed with this, to the extent that there is logic in grandfathering an existing investment, but not an existing arrangement. If an existing arrangement is grandfathered, that is, allowed to exist without applying GAAR, many conduit companies (say, a letter-box company) would continue to get protection even after GAAR is applied. Stakeholders also agreed with the committee that the intention is that all investments (and not arrangements) existing at the date of commencement of GAAR should be grandfathered. If such investment is exited on
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The committee has also suggested that certain circumstances described in Section 97 (4) not be treated as irrelevant, but as not sufcient. This suggestion is
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or after the date of commencement of GAAR, past income will not attract GAAR. This recommendation of the committee is also justied. Status of Circular 789 of 2000: Circular no 789 of 2000 provides that once the Government of Mauritius gives a certicate of residence, the revenue authority will not challenge it and give an investor the benet of the tax treaty. Stakeholders asked for continuing it and not applying GAAR on such investments from Mauritius. It is clear that the circular contradicts the purposes of GAAR. The committee has recommended that it continue. If the government takes a policy decision to review the situation, the treaty with Mauritius should be revisited rather than challenging it through GAAR. I agree that it is a correct recommendation since doing it the other way round will lead to undue litigation. And it will surely make the treaty-making powers of the government shaky. Making Capital Gains Tax Zero: This issue is not directly linked to GAAR but indirectly relevant because GAAR is seen as working against the investment climate in India. The committee has recommended that short-term capital gains tax be brought down to zero. It is zero in other countries and this move will bring India on a par with them. The tax collected being only Rs 3,000 crore, this should be taken as a good move. But the suggestion that the securities transaction tax be increased to offset the revenue loss is not good because the idea of promoting investment will not materialise if this is done. Burden of Proof: Theoretically, the burden of proving evasion or avoidance should be on the revenue authority. The original version of GAAR had thrown the burden of proof on the assessee, which created such a tumult that the government amended the Finance Act to shift the burden partially to the revenue authority. The committees report has a provision for discussing alleged tax avoidance with the assessee before the assessing ofcer writes to the CIT. It has recommended that the assessing ofcer
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clearly write down the details of the transaction that he thinks are impermissible from the point of view of GAAR. He also has to indicate what the view of the assessee is. So the burden of proof is discharged at different stages. First, the revenue authority does it by making certain tentative conclusions about impermissibility based on the four tests laid down in Section 96 (1) and it is then discharged by the assessee by giving his version of the issue. Thereafter the assessing ofcer can, if he disagrees, write a clear reference to the CIT in which he has to spell out why he disagrees with the assessee. The committee has done a good job by designing the format for referring to the higher authorities at every stage. This will avoid the assessing ofcer or the CIT being tempted to make a sketchy reference without any detailed reasoning. Thus the onus of proof is discharged by both sides, which is known as shifting of burden of proof. This should allay the fear of assessees on discharging the burden of proof. Stakeholders having agreed that it is adequate safeguard and it must be said that the committee has done well to mitigate their fear of being at the receiving end when it comes to burden of proof. Postponing for Three Years: It is here that the committee has gone thoroughly wrong. All the arguments for deferring GAAR on administrative grounds are unconvincing. The committees view that it is an advanced instrument for tax administration, which needs intensive training in the ner aspects of international taxation, is valid, but it does not make sense that the training will take more than four years. If GAAR is implemented for 2013-14, which means the assessment year 2014-15, the time available for training is from now to 1 April 2014, which is 18 months. Senior ofcers can certainly be trained in this time. Once the Central Board of Direct Taxes (CBDT) starts training them by sending some of them abroad and to various places in India, the job can be done in 18 months. Moreover, the specic examples given in the report are the basis of training. Seminars and workshops can
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be held to make things clear to the assessing ofcers. The committee has made the GAAR provisions friendly to taxpayers by suggesting that assessing ofcers give a detailed explanation for choosing a case for action. There will also be a negative list where GAAR cannot be invoked. In addition, there will be examples where GAAR cannot be invoked. If GAAR has been thus freed of most kinks and whims, there is no reason why it cannot be implemented from 2013-14. Conclusions The report is very business-like and dedicated to the purpose it was supposed to serve. It has rened denitions, curtailed vagueness, limited actionable violation to the main purpose of a transaction, suggested the introduction of a negative list, given specic cases where GAAR cannot be invoked, recommended the grandfathering of certain investments and blunted the controversy about discharging the burden of proof. It has also achieved the almost unachievable task of making stakeholders accept and welcome the changed GAAR, which had been initially dreaded. And it has not modied GAAR substantially, only blunted its sharp edges. The report has smoothed the creases in GAAR without changing the fabric, to borrow an expression Lord Denning used to describe how judges should interpret exemptions. If the Shome Committee report has made GAAR so much more acceptable, it is all the more reason why the system conceptualised in the report should be implemented in time. If it is so stakeholder-friendly, why delay it at all? There is absolutely no reason to defer its implementation for three years. Four years from now, there will be a different government and a different parliament. As we all know, no parliament can bind its successor.

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