The Parthasarathy Shome Committee Report on the general anti-avoidance rules, if accepted, may take some of the bite out of the proposed changes to income tax law, but at the very least, will reduce the growl, as some analysts put it. The Shome Committee has recommended that the implementation of GAAR be deferred by three years; since GAAR is an advanced instrument of tax administration, the report contends, it would require intense training of tax officials on the finer nuances of international taxation. Tax avoidance regimes like GAAR are meant not so much for revenue generation as much as a deterrent to dubious behaviour, and that calls for a certain degree of specialization that the current tax administration may not have. That apart, in a world of very freely mobile capital, giving the global investment community sufficient time to prepare for compliance with the new rules is good international practice. The committee’s report also recommends that the ambit of GAAR be narrowed, making it applicable only to contrived and artificial transactions whose sole or major purpose abuses legal tax provisions designed to encourage greater economic activity and investment.
The recommendations — and Finance Minister P. Chidambaram’s assurance that he would review the recommendations carefully — bring comfort to investors and the stock market that has gotten used to relying on foreign institutional investor money and companies which propose to invest directly in businesses. Many of them route their investments through tax havens like Mauritius. Some of the largest foreign direct investments are also held through subsidiaries incorporated in Mauritius. But most people also agree that India needs instruments to curtail large-scale tax avoidance; they would rather have a well-crafted, detailed set of guidelines. Most of the time, the onus of proving that tax returns are compliant with the law lies on the tax-payer, especially for large firms and complicated business structures. GAAR, on the other hand, will require tax officials to substantiate any claim that a company is using a particular tax avoidance device to escape having to pay a huge tax. That means a cultural shift in the income tax department’s world view. Everything else apart, GAAR losing its growl is music to many ears.