This year’s General Budget introduced a strange acronym to the Indian economy—GAAR. For those who are raising their eyebrows, it means ‘General Anti Avoidance Rule’ and is aimed at regulating tax structure and controlling avoidance of tax. Tax avoidance seriously undermines the achievements of the public finance objective of collecting revenues in an efficient, equitable and effective manner. GAAR aims to target tax evaders, stopping Indian companies and investors from routing investments through Mauritius or similar tax havens for the sole purpose of avoiding taxes

The immediate context of introducing the GAAR is the Vodafone Essar Supreme Court case and ruling which was in favour of the company. The verdict simply states that the Income Tax authorities in India will not have any jurisdiction over a sale transaction which happened elsewhere (outside India), with neither the buyer nor the seller being an Indian resident. And in the meantime Vodafone Essar, a part of the UK-based Vodafone Group, has been asked to pay an Income Tax of `11,000 crore. Vodafone which is the second-largest telecom operator in India has hailed the judgment. The introduction of GAAR in the General Budget 2012-2013 has raised suspicions and apprehensions in the corporate world. Now there is this belief that a “stricter tax structure” will discourage foreign investments. As a result it will accelerate India’s economic crisis. Critics say that GAAR has created an uncertain and arbitrary environment in India. They also contend that the sweeping powers granted to the “assessing officers” to question transactions done by any company and to label it as “tax avoidance”, provides them an enormous scope of power which can be easily abused. However, the GAAR proponents say that the rule will improve revenue collection and stop the entry of black money into the country. Sensing the opposition and apprehensions of the corporate world, the Centre has deferred the implementation of GAAR for a year. Recently, Prime Minister Dr Manmohan Singh, who also holds the Finance Portfolio, set up a committee to prepare fresh norms on the controversial tax provision to bring 'greater clarity' and prepare a roadmap by September 30, 2012, for its implementation. The four-member committee is to be headed by the Indian Council for Research and International Economic Relations (ICRIER) chief, and taxation expert, Parthasarathi Shome. The committee will submit its report after consulting stakeholders. Democratic World spoke to two experts to gauge both sides of the story. Talking in favour of GAAR is Dr S. Narayan, President of the Centre for Asia Studies, a policy think-tank based in Chennai. And pointing out the problematic bits of the rule is economist Bibek Debroy. Debroy was educated at Delhi School of Economics and Trinity College and began his career as an academician.

DR S. NARAYAN//  The anti-avoidance rule has been brought to strengthen the tax regime and plug loopholes that are being used by investors and corporate houses to avoid taxes. Due to the lack of a proper mechanism to check tax avoidance, black money is being pumped into our country. The Centre wishes to stop this practice and the antiavoidance rule is a way to streamline that investment and push-up revenue generation. We want investments flowing into this country to come through proper channels. I believe that the anti-avoidance rule is cardinal to India and we need it, at least in this stage of the country’s economic growth. This law is not specific to just India, other countries have it as well. Liberalisation does not mean a free run to all kinds of investments. It means allowing the right investment which enables growth and profit through legal channels. If you allow indiscriminate investment without checking its source, there would be trouble. However, people are not ready to put their trust into the rule as yet; so the Prime Minister’s Committee has been appointed to look into it. The committee will monitor the rule’s role and impact on revenue generation and fine-tune it in relation to policies. I realise that people fear that the rule/ law may be manipulated or used against investors. And the committee will look into this aspect. It will ensure that the law stays investor-friendly. I believe that the present Indian income tax rules and regulations are not investor friendly. If GAAR comes into being, then it could become instrumental in inviting potential investors. We need to stop taking the easy route if we really wish to check tax-evasion. Just because investors are opposing it, we should not bring in the GAAR? I am sorry, but I cannot subscribe to such a baseless argument. Why should an honest tax-payer be afraid of the GAAR? Only those who wish to avoid tax, will fear it. Do you think a genuine investor will oppose it? It is a law that is a must for an economy such as ours, as it ensures tax security. Albeit a little modification may be required. But that is where the committee comes in—to ensure that it is in the best interest of everyone. Every businessperson should feel comfortable while investing in India. We are looking forward to inviting more foreign investments into this country. Before we do that we need to decide exactly what kind of investment we want—legal or illegal? GAAR has been suggested keeping in mind the larger interests of our country. And believe it or not, law and investment can go hand-in-hand. In fact, they do coexist peacefully in other economies. Contrary to what many are saying, I do not believe that the law has been introduced post the Vodafone Essar case (which I will point out as a solid example of tax avoidance). It would not be erroneous to assume that the company took advantage of the lack of a clear law on anti-avoidance. After all, the deal was related to an Indian company. Just because the transaction took place outside India does not give a firm the right to avoid tax in India. Off late there has been increasing talks on corruption in this country. GAAR can check the source of black money (which is a related concern) and make dealings and transactions transparent.

BIBEK DEBROY//  I do not believe that any of the concerned parties have anything personal against the General Anti-Avoidance Rule (GAAR). The reason behind all the hullaballoo is because of the way the rule is being pushed by the Centre. Any attempt at the implementation of an important rule should be better thought-out and planned. I believe that the issue needs to be examined within the context of the Direct Tax Code (DTC). DTC already lays down provisions for the anti-avoidance rule. Had GAAR been introduced as a part of the DTC, there would have been less reservations against it. The core problem does not lie in the idea, but in the manner in which it is being pursued. For now, the question bugging every mind is; will this rule prove to be anti-investment? It might, if it is implemented in an arbitrary fashion. It might also lead to an abuse of power. If it is implemented in a systemic fashion—and here I am not talking about any particular ‘case’—then there is always a possibility that it might it work. The rule, as a whole, may appear to be against investment and corporate sectors, but I believe it is rather too early to speculate. We should ideally wait for the Prime Minister’s Committee Report. How far will the committee’s recommendations be acceptable to the corporate or industrial sectors remains to be seen. Does India need something like the GAAR? Yes, but not in the manner that is being suggested. One needs to look at it as the removal of exemptions. Remember the core issue is of ‘tax avoidance/exemption’ which is not the same as tax evasion. Exemption/ avoidance is perfectly legal, while evasion is not. As long as it addresses the issue, the anti-avoidance rule might just work out. What I have been saying often is to treat every case as unique. The Vodafone Essar case was one of its kind. It began in July 2011 when Essar Communications and Essar Com, both wholly-owned subsidiaries of Essar Communications (Mauritius) sold 22 per cent stake in Vodafone Essar to the Vodafone Group; as a part of a larger deal. Vodafone bought out Essar’s 33 per cent stake in Vodafone Essar. Under the pact, Vodafone paid Essar, but withheld an additional `4,426 crore as tax. Both companies had then said they believed there was no tax due on the deal. Both felt it was wiser to deduct and pay withholding tax. And then have Essar Communications and Essar Com claim a refund. The Indian revenue authorities, on their part, claimed that though the deal was inked between two foreign entities via share transfer, the deal should be taxed in India because it involved Indian assets. The income tax department charged Vodafone Plc for not deducting tax at source. Recently, Vodafone won its case against the incometax department in the Supreme Court. Thus, establishing a certain precedence. The court ruling goes against the new antiavoidance rule that is being contemplated. If the GAAR comes into being; will it come in a retrospective manner? Will the Centre levy penalty to the companies for the deeds of the past? The Centre should have stated the basis of all transactions much ahead—I have a problem with the knee-jerk reaction that the policy makers are adopting. Had our policy-makers and administrators been forward thinking they would have acted earlier. Any action taken retrospectively is always problematic—that is why the Vodafone Essar snowballed into a controversy. We seriously need to ask ourselves whether India’s investment climate will go up with such a rule? India’s investment climate has deteriorated because of 50 different reasons and GAAR is one of them. We need rules which are investment friendly, and GAAR cannot be more ill-timed. And the manner in which it is being ushered in is creating suspicions in the minds of the people. GAAR has affected the morale of the investors. I hope the PM’s committee will address this. GAAR is adding to the pessimism prevalent in the country.