Don't delay GAAR

Last Updated: Mon, Sep 03, 2012 19:22 hrs

There is no question that the proposed General Anti-Avoidance Rules, or GAAR, need to be reviewed. To the extent that they give excessive discretion to the tax assessment authorities, they are clearly unsuitable for a country like India where the tax department has often been accused of harassing its taxpayers. Compliance with tax requirements is difficult enough currently; allowing more levers for potential harassment to income tax officers is a dangerous step. The government’s move to set up a committee headed by tax expert Parthasarathi Shome was, thus, welcome. The Shome committee’s draft report, which was released on Saturday, however, is worrying in its own way. The delay by three years for “administrative” reasons, in particular, is questionable. Remember, GAAR was always proposed to be part of the new direct taxes code, which was supposed to be in force by now. What additional preparation time will three years gain? It merely kicks the responsibility for introducing GAAR and calming market participants over to the next government. It strains belief to assume that, by that time, distrust of the income tax authorities will have ended.

GAAR needs to be redrafted to ensure that excessive discretion is minimised — but six months is long enough to do that. The new tax policy should be in place by the next Budget. To try any less hard would be to betray the core purpose of GAAR: to serve as part of a co-ordinated, international crackdown on the sources and destinations of unaccounted-for and tax-avoiding money. This was a compact between the countries of the G20 post the financial crisis, when government resources were crucial to staving off the worst that could happen; and it is clearly something that voters desire. The government should do it properly, and do it now.

Some other aspects of the recommendations are equally questionable. For one, there is insufficient recognition that the incentivisation of “foreign” investment from Mauritius must end. The tax treaty that India currently has with Mauritius must be renegotiated, and the grandfathering in of investment made under more lax rules must not also perpetuate the “evergreening” of tax-free pipelines even after laws change. Entities investing in India must be properly regulated, even if in low-tax environments like Singapore, and should meet more stringent know-your-customer requirements than has hitherto been expected of those from Mauritius. The “Mauritius route” is unsustainable, and must be closed. A clear timeline and method to do so must be laid out.

Finally, there is the question of tax on short-term capital gains from listed securities, which the panel suggests be ended. This – yet another attempt to boost listed securities as destinations for India’s savings – is problematic in isolation. However, the Shome committee suggests that securities transaction taxes receive a compensating hike, in order to ensure no loss of revenue to the government. That has some points in its favour: a securities transactions tax does have the advantage of ensuring that more people come into compliance with the law. It serves as an incentive against speculation. It is simple. These are all positive qualities. In the end, it must be remembered that India’s tax system is starkly regressive, and taxation is too easy to avoid. The concerns of equity must be borne in mind when designing taxation. GAAR is an essential tool towards equalising the tax burden, and must not be watered down beyond recognition.

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