The committee appointed by Prime Minister Manmohan Singh to prepare a road map for implementation of the General Anti-Avoidance Rules (GAAR) in its report on second draft guidelines has focussed on removing all apprehensions associated with the controversial rules, announced in the budget this year. In an interview, chairman of the panel, former advisor to the finance minister and taxation expert Parthasarathi Shome tells Santosh Tiwari the committee felt there should be no uncertainty on the timing of implementation of GAAR and foreign and a domestic investor should be treated equally in taxation. Edited excerpts:
The finance ministry had put up the first draft guidelines. How do you compare the first one with the second draft guidelines which you have submitted to Finance Minister P Chidambaram?
You can’t compare the first and the second drafts. It will not be proper. We have taken a look at draft guidelines independently and consultations have been done with a wide range of stakeholders. Among the important features, we have suggested that for any transaction to come under GAAR, tax benefit should be the main purpose. I think we have taken an independent look at it. The idea is to look at GAAR as a deterrence aspect rather than revenue generation aspect. The whole focus in our report is different.
The most important recommendation by the committee is that of removing capital gains tax. What is the logic behind it?
The issue is if you look at Annexe 6 of the report, many countries have exempted capital gains to attract investment and at this juncture, we certainly need investment in India. If you want to harmonise your tax framework with international practices, you have to look at it from that point of view. Whether it is foreign or domestic, you can’t differentiate in this manner from the tax equity point of view. Looking specifically at GAAR, tax revenue is a small amount. One can expand the tax base in many other ways – tax neutrality should be the basic element.
The industry view has been that the tax administration was required to be attuned first to handle GAAR and then it should be brought. You have agreed with that view. Isn’t it?
I think training is very important in this case. It is training in a very specialised area and that is what the committee has suggested. This is certainly possible if a concerted effort is made in this regard. You have to be specialised yourself in handling GAAR and in fact what is required is continuous training, not just today. It has to be understood by everybody that GAAR is an extremely advanced instrument of tax administration to be applied as deterrence, rather than for revenue generation. Intensive training of tax officers, who would specialise in the finer aspects of international taxation, is needed for this. Most stakeholders pointed out during the consultations that the experience with international taxation such as transfer pricing based on the thin training module, in contrast to international benchmarks, tends to result in administrative challenges. At the same time, taxpayers has to be given time to get out of arrangements with tainted elements of tax avoidance, and embrace a new regime such as GAAR.
The basic objective behind appointing the committee under you was to remove apprehensions pertaining to GAAR, which has dampened investor sentiments in a major way. How did you tackle this issue?
We have made it clear that the announcement about when the government wants to implement GAAR should be made today so that there is time for preparation for everybody, tax payers and others stakeholders and they have clear understanding of the tax regime also. And then, you can implement and go after big cases. It also becomes clear if people know the exact time when it is coming, that, it is a tax deterrence issue. This is why we have recommended that GAAR should be deferred for three years. But the year, 2016-17, should be announced now. In effect, therefore, GAAR would apply from assessment year 2017-18. Pre-announcement is a common practice internationally in today‘s global environment of freely flowing capital.
Taxation of FIIs has also been added to the committee's work. This would require a comprehensive and cohesive look at the entire cross-border transaction gamut. Isn't it?
We will look at that also and submit the final report by the end of this month as scheduled.
How do you see reworking of the Direct Taxes Code (DTC) in the light of changes in GAAR and other cross-border transaction areas?
On that of course, I am sure the finance minister will move forward.
Retrospective amendments in the Finance Act, 2012 to tackle Vodafone-like cases have also been seen as a major dampener on investor sentiment. How should the government approach this issue in your view as you have been asked to cover this area also?
In the work that we will undertake now on the added terms of reference, we will look at it.
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