The revised discussion paper released by the government on the Direct Taxes Code (Code) brought cheer on many fronts such as the minimum alternate tax (MAT), personal taxation and special economic zones, (SEZs). However, the discussion paper falls short on various recommendations made with reference to the General Anti Avoidance Rules (GAAR).
The revised discussion paper clarifies that GAAR does not envisage that every arrangement for tax mitigation would be liable to be considered as an impermissible avoidance arrangement. It is only in a case where the arrangement, besides obtaining a tax benefit for the assessee, is also covered by one of the four conditions, i.e. it is not at arm’s length or it represents misuse or abuse of the provisions of the Code, or it lacks commercial substance, or it is entered or carried on in a manner not normally employed for bona fide business purposes, would the GAAR provisions come into effect. In addition, the revised discussion paper proposes these safeguards:
- The Central Board of Direct Taxes (CBDT) will issue guidelines to provide for the circumstances under which GAAR may be invoked.
- GAAR provision will be invoked only in respect of an arrangement where tax avoidance is beyond a specified threshold limit.
- The DRP forum would be available when GAAR provisions are invoked.
NOT ENOUGH CHANGE
In essence, the GAAR provisions as introduced in the Code remain the same. The government has only proposed to provide some safe harbour rules where such provisions will not be invoked. The discussion paper provided that GAAR legislation exists in a number of countries and can act as an effective deterrent and compliance tool against tax avoidance, thus ruling out the possibility of introducing specific anti abuse rules, which could provide certainty. It is interesting to note that even the most developed countries like the USA and UK do have GAAR.
Internationally, the GAAR provisions are used sparingly and in exceptional circumstances. There are adequate administrative guidelines issued to ensure that such provisions are not misused.
Over the years, the effort of the government have been to remove discretion and bring certainty in the tax provisions; however, the GAAR provision is discretionary and has far-reaching implications.
There needs to be a mechanism to obtain advance ruling, which is prevalent in many countries to provide certainty to the transaction. The recommendations were made to apply the GAAR provisions prospectively and not to cover the previous arrangements. The GAAR should also be applied only in transactions with related parties and it may be safe to assume that third-party arrangements will be on a arm’s length basis. However, the discussion paper is silent on these important recommendations.
The GAAR provisions, unless watered, will only cause uncertainty and ambiguity in the minds of taxpayers. Considering the global experience of limited usage of GAAR and the pro-revenue mind set of tax authorities, the government needs to thoroughly deal with each and every apprehension of the taxpayers with regard to this anti-abuse provision.
Shyamal Mukherjee Executive Director & Joint Leader of Tax Practice, PricewaterhouseCoopers