What this Budget may herald, and the impact should it happen
The FM has announced the deferral of implementation of the General Anti Avoidance Rules (GAAR) by two years and the grandfathering of investments made before 30 August 2010. This break of two years is expected to provide an opportunity to the tax administration to gear up the machinery to administer the GAAR. One should not forget that even in the absence of statutory GAAR, the judicial GAAR has always been prevalent in India. The business community is keenly waiting for the certainty on interplay between the GAAR and the SAAR (including LOB clause in tax treaties). The FM has merely announced where GAAR and SAAR are both in force, only one will apply to a given case.
Given that the GAAR is now proposed to be deferred and that there is a need to raise more revenue to reduce the fiscal deficit, Budget 2013 may introduce more specific anti-avoidance rules (SAAR) to address the known tax avoidance arrangements and GAAR is left for the balance others. There is uncertainty on the effect of Circular No. 789 vis-a-vis the applicability of GAAR. The approach of taxman in field to collect the taxes is more action oriented rather than relying merely on changes in law or introduction of GAAR. Many times the actions go beyond that would perhaps have been permissible in the framework of GAAR. The real challenge is to make the interaction between the taxpayer and the administration more effective, less aggressive and less adversarial.
Leader, direct tax practice, PwC India.