Opinion: Jaitley Should Postpone GAAR, Minimise Tax Litigation

(Manish Desai is Partner, Deloitte Haskins & Sells)

"Achhe din aane wale hai" which means "Good days will come" was the slogan of the present Government during General Elections 2014.  This has now become the hope of more than a billion Indians.  For the good days to come, the Indian economy will need to grow at a rapid rate. The central government has taken some steps to create a positive and friendly business environment.  

However, various other measures could be required in order to bolster investor confidence and remove bottlenecks in order to improve ease of doing business in India.  As a first positive step, the Ministry of Finance has given a voice to the people and have invited suggestions with respect to Budget 2015 from the general public.  

With the Budget on the horizon, the government has already blown the 'Reform' trumpet by announcing policy changes in insurance, land acquisition and relaxations in the Foreign Direct Investment Policy.  Some direct tax aspects which may need consideration are outlined below:

General Anti Avoidance Rules

The date for implementation (1 April 2015) of the General Anti Avoidance Rules (GAAR) is approaching soon.  GAAR provisions are anti avoidance provision intended to deter tax avoidance.  It may be recalled that GAAR provisions were first introduced in Budget 2012.  After major hue and cry by the stakeholders, the implementation of GAAR provisions was postponed for 3 years to 1 April 2015.  One of the key aspects with respect to success or failure of GAAR provisions is likely to be the ability of the tax authorities to appropriately implement the same. The application of GAAR will require an extremely mature approach from the tax authorities. Under the chairmanship of Dr Parthasarathi Shome, the expert committee report has provided a number of recommendations.  

In view of these factors and given the need to make India an attractive destination to do business, it may be worthwhile to consider a further postponement for implementation of GAAR provisions.    

Indirect Transfer of Assets

Another issue which has always generated keen interest is the taxation of indirect transfer of Indian assets.  The Supreme Court settled the issue once and for all in January 2012 by deciding the case in favour of the taxpayer.  However, the legislation was amended by the government in Budget 2012 to introduce highly complex and ambiguous provisions with respect to taxability of indirect transfer of Indian assets.  

As per these provisions, any asset in the nature of shares or interest in an entity incorporated outside India would be deemed to be situated in India (and hence subject to tax in India) provided it derives substantial value from assets situated in India.  There is no clarity with respect to the meaning of the term 'substantial'.  Recently, the Delhi High Court in the case of Copal Research Ltd has interpreted the term 'substantial' to mean 50% or more.  The law should be amended to provide appropriate guidance as to what threshold value of Indian assets would constitute "substantial".  

The Expert Committee on Indirect transfers under the chairmanship of Dr. Parthasarathi Shome has made several recommendations with respect to the taxation of indirect transfer of Indian assets. The Shome Committee had recommended that the payer of consideration in case of indirect transfer taking place prior to the retrospective amendment, should not be treated as a defaulter for non-withholding of tax on account of retrospective amendment.  

Further, the Shome Committee has also recommended that there should be some exemption for small shareholders.  It may be interesting to note that shares of many foreign companies which derive 'substantial' value from Indian assets are traded on various stock exchanges resulting in the requirement for every buyer to withhold Indian taxes.  This may not be practically feasible.  In order to reinforce the faith of global investors in the Indian tax system, it is imperative to give effect to several key recommendations of Shome Committee.     

Minimizing Tax Litigation

Another major issue dogging the Indian tax system is endless litigation. As per the Finance Minister's last Budget Speech, there is Rs 4 lakh crore of disputed revenues.  Some stern steps are required to be taken in order to clear the blockage.  In 2009, the alternate dispute resolution mechanism in the form of Dispute Resolution Panel (DRP) was introduced.  It seems that the DRP has not been able to achieve the desired result. The Authority for Advance Rulings which provides tax certainty to non-residents has also failed to live up to expectations.  Some reforms with respect to these forums are of paramount importance.  

Thus, the stage is set for the Finance Minister to recapture the imagination of foreign investors and redefine India as an irresistible business destination.

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