Better late

With GAAR's deferral, India's tax laws could look more settled to investors, domestic and foreign

The announcement of a two-year deferral for the General Anti-Avoidance Rules (GAAR) would appear to be in line with measures to attract investment into the economy, such as the liberalisation of foreign investment in multibrand retail and the raising of the cap for investment from abroad in government and corporate debt. With external indicators like the current account deficit threatening to close the year at 4 per cent of the GDP, and internal indicators, such as the growth rate of the economy, reflected in an anaemic index of industrial production, the government had limited options. Finance minister P. Chidambaram has done well to make it clear that he will allow a long lead time for the new rules to come into effect.

The minister has introduced some changes to the GAAR recommendations of the Parthasarathi Shome committee. Two of these, the approving panel and the grandfathering clause, are departures that could be contested by investors. The ruling by the proposed three-member tribunal has now been made binding on the taxpayers and the department, a move that shortens the litigation cycle going ahead, but whose mandatory nature could be controversial. The date for the clause on the grandfathering of all tax cases in the ambit of GAAR since August 2010 could have been brought forward, instead, to the date of the current notification.

The changes mean that a large segment of the Indian tax laws will look settled to investors, domestic and foreign. The minister has made no mention of the capital gains tax regime, though the Shome committee had suggested phasing it out. In all probability, the minister will take a call on those issues in the forthcoming budget. He has not mentioned anything about the fate of the Vodafone tax case. But as the tax demand in that case fell under Section IX of the revised Income Tax Act, rather than the omnibus provisions of the GAAR, the litigation in the case stays alive. Though the Shome committee had said that the tax demand was not justified, even if the tax giveaway was huge, this may be a matter for further deliberation. GAAR, too, despite the prime minister's promise to re-examine the subject, took about six months to resolve.

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