GAAR: Irrational tax laws or misplaced arrogance?

May 9, 2012

(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)

The congratulatory press clippings proclaiming the ‘rollback’ of measures in Finance Bill 2012 have suddenly cleared the air and even the stock market cheered on Monday.

The implementation of the much riled General Anti-Avoidance Rules (GAAR) was deferred till April 2013.

The onus of proof when invoking GAAR will now be shouldered by the tax department. More importantly, it has also provided for an independent member on the GAAR board.

Finally, the GAAR has been subjected to the advance tax rulings facility so that its applicability can be established before the transaction is executed, thereby providing investors with the ability to plan their tax liability in advance. Such rulings will be binding to the applicant and the Commissioner unless there has been a misrepresentation of facts.

It has been well established for some time in Indian law that tax planning will only be legitimate provided it is within the framework of the law and the use of colourable devices which (even though within the letter of the law) results in defeating the basic legislative intent of the tax statute cannot be permitted.

At the same time, it was also well known that even countries like Australia and Canada, widely touted as examples of open economies, had enacted similar tax provisions as far back as the 1980s.

Also, most developed economies have their own version of GAAR with uncertainties surrounding their relationship with respective double tax avoidance agreements. We may also not be too different when it comes to ensuing litigation, especially when the onus of proof in these countries is borne by the taxpayer.

Therefore, following this fairy tale ending amidst screaming headlines, why have some of us been left with such a strong unsavoury taste?

Speaking for myself, ever since the Finance Bill was presented, the entire issue has made a mockery of India’s ability to foster a dependable economic environment. I was also upset by the cheeky comments of overseas investors about the demise of the India growth story due to our inability to ensure a safe ground for foreign investments.

I do not believe that, however inconvenient, India’s GAAR if presented well, could have been so openly resented by the international investor community. We would certainly have been well advised to emulate the UK and provide in the original Bill itself a year to implementation, thereby giving the FIIs and their friends sufficient time to exit current arrangements.

I am not sure how many of us share my realisation of having suffered a drubbing in the face of intense pressure at the hands of the FIIs, who did not waste any time in exploiting the wide gaping chink in our economy’s armour; the rupee currently at the mercy of a widening trade and fiscal deficit.

What happened was a swift demonstration of what could happen if we let our nationalism get the better of us. The past couple of weeks should serve a reminder to all Indians that only economic prowess can ensure economic freedom.

Having said all that, I have not been able to understand why it was so difficult for us to come up with a GAAR with the amendments which were made now — we could have avoided the so called ‘rollback’.

Surely, we do not lack the talent and maturity to recognise the potential for embarrassment in ignoring the inherent pitfalls in retrospective tax legislation combined with the risk of using hot money to fund our deficits.

Is it so difficult for us to realise that just as volatility translates into equity market risk, unpredictable and irrational tax laws impart risk in economies?

Or is it merely misplaced arrogance?

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