We are concerned about the manner in which general anti-avoidance rules (Gaar) may be applied. We welcome the Prime Minister’s intervention to set up an expert panel chaired by Parthasarathi Shome to frame the guidelines on Gaar.
Many countries have such a framework, but we need to tread carefully in its implementation. The formulation of rules here is a complex process. Though Gaar is now part of the I-T Act, government should move cautiously and ensure that it does not hurt growth and investment.
Gaar empowers tax authorities to invalidate any arrangement if it is entered into by the assessee with the objective of obtaining a tax benefit. It is subjective in nature. Tax officials would have wide-ranging powers to declare any arrangement as ‘an impermissible avoidance arrangement’.
Certainty and stability form the basic foundation of any fiscal system. Gaar provisions, in their present form, would introduce uncertainty in terms of tax implications of various business and non-business arrangements. Business decisions are made on a real-time basis. If the revenue department were to sit on judgment in hindsight, it would introduce considerable uncertainty.
One of the main worries with Gaar, in its present form, is that the onus is on the assessee to prove that tax benefit is not the main purpose of an impugned arrangement. An anti-abuse provision that shifts the burden of proof on the assessee goes against the fundamental principle of ‘innocent unless proven guilty’.
Another concern for foreign investors is the applicability of tax treaties. India, which is looking at significant inflows of capital, cannot sacrifice growth at the altar of tax revenues. Under no circumstances should Gaar override the tax treaties.
The guidelines on Gaar should leave no room for ambiguity in its application. This can be achieved only if we have a large number of examples specifying where Gaar can or cannot be invoked. A review mechanism at the finance minister’s level to ensure that Gaar is invoked as an exception rather than a rule and only in deserving cases would help. Ideally, Gaar should become specific anti-avoidance rule.