Speaking in Hong Kong on January 22, 2013, India’s finance minister Palaniappan Chidambaram assured international investors that India has buried the “ghost” of General Anti-Avoidance Rules (GAAR), which were designed to counter aggressive tax avoidance. GAAR became law when the Finance Bill 2012 was passed in parliament and was supposed to come into effect from April 1, 2014. But foreign investors were worried about the rules, which provided a lot of discretionary power to tax authorities to come down heavily on those who enter into arrangements solely to obtain a tax advantage or exploit the country’s tax laws to their own advantage.
To assuage these foreign investor concerns, in mid-July 2012 India's prime minister, Manmohan Singh, approved the establishment of an expert panel under the leadership of Dr Parthasarathi Shome, a professor at the Indian Council for Research on International Economic Relations, to review and finalise GAAR guidelines. The panel's final report was submitted on September 30, 2012. The finance ministry examined this report and, on January 14, 2013, accepted most of its recommendations. “GAAR will be applied only in cases of tax avoidance. The finance ministry has tried to strike a balance between investment concerns and revenue interests of the government,” said Mr Chidambaram.
GAAR has now been deferred by two more years and will come into effect from April 1, 2016. To address concerns over the tax authority’s discretionary powers, one of the important recommendations that was accepted was the adjudication of tax demands by an independent approving panel comprising a high court judge as a chairperson, one chief commissioner of income tax and a scholar specialised in direct taxation. Investments made after August 30, 2010 will be grandfathered. The two-year deferral is also intended to provide time for the tax machinery to upgrade its capabilities to handle GAAR.
The panel was also tasked with looking into another controversial amendment in the country’s laws, which allowed retrospective taxation of offshore mergers and acquisitions. The amendment could be undone when Mr Chidambaram presents the next Union Budget for 2013-14 at the end of February and the Finance Bill for 2013 is approved by parliament.
In the meantime, senior management from UK telecom company Vodafone – which was given a $2.2bn tax bill under the amendment for its acquisition of Hutchison Whampoa’s stake in a local telecoms entity in 2007 – met with senior finance ministry officials on January 15 to discuss the matter and seek a settlement. However, no headway was made in the meeting.
N Chandra Mohan is an economics and business commentator based in New Delhi