GAAR: FinMin buys time to refurbish laws

After being snubbed by the Supreme Court (SC) on the Vodafone tax case last January, the income tax department brought in amendments to tax laws to ring fence them from prying by the courts. Essentially, the amendments covered the structures created to allow officials to explore tax avoidance as well as open cases for retrospective taxation. The former set comprised GAAR — general anti-avoidance rules — which for the first time in India led to a flight of capital from the stock markets, something that had not happened even at the peak of the Asian meltdown or during the market upheavals in the 2001-04 period. The Prime Minister had to set up a committee under tax expert Parthasarathi Shome, now advisor to finance minister P Chidambaram, for soothing the chafed investor sentiments. The committee attempted to set right the patch work job done by tax department and recommended deferring the anti-avoidance rules by 3 years and exemption of P-Notes and FIIs not seeking treaty benefit. The gap years would be used to train tax officials in finer aspects of the highly advanced tax tool, while sparing the FIIs and non-resident investors would showcase India as a stable, investor-friendly tax regime. The second suggestion might read surprising but is something that needs consideration. Data mining is almost absent in the Indian tax department yet is the bedrock for mature economies. Faux pas over the first introduction of STT, or the lack of clarity on defining permanent establishments are some of the consequent examples.

A complicated piece of legislation like GAAR is therefore a fraught exercise in these circumstances. The finance ministry by deferring GAAR for two years has thus bought the time to accomplish a packed agenda of refurbishing tax laws, equip the tax officials and provide breather to overseas investors.

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