Finance secretary R.S. Gujral spoke in an interview about the budget’s provisions on general anti-avoidance rules (GAAR) and the concerns this has raised. Edited excerpts:
Vodafone has issued a notice to the government under BIPA (bilateral investment promotion and protection agreement between India and the Netherlands). Are they justified in raising the notice under BIPA and what’s going to be the government’s stand?
BIPA is of course dealt with by my colleague (R.) Gopalan (secretary, department of economic affairs), but off-hand what I can say is that currently the proposal is before Parliament. There is no statute against which they are objecting. Their course of action would arise only after these statutory amendments are put in force. So they don’t have a cause of action today. Having said that, I would say that I’ve had a cursory look at the investment agreement. There is really no provision for them to challenge any issue which is related directly to taxation. Another point which is relevant is that they took a stand before the Supreme Court that it was not an investment in India, it was not a sale of business in India, it was merely a transfer of shares from the Cayman Islands to another tax haven; here they are saying the reverse. Here they are taking the position that it was an investment in India.
Paragraphs 4 and 5 of that BIPA agreement say that irrespective of the grant of national treatment and most-favoured-nation treatment, they will not apply, in respect of an international agreement or alignment, to taxation or any domestic legislation. Will some of these provisions be discussed with the global chief executive officer of Vodafone? And doesn’t this confirm that as far as taxation issues are concerned, this particular treaty is actually silent on that?
Let me say (that) internationally there are certain treaties which talk of expropriation due to tax. The earlier US model agreement also had certain provisions regarding expropriation due to tax, but now most of the treaties do not have any provision for expropriation due to tax and this particular treaty does not have that provision. In fact, the paragraph that you are talking of, it specifically...says that all arrangements or legislations which relate predominantly to tax are excluded.
Investment concerns: Gujral said FIIs participated in three meetings of the GAAR rules committee amd their concerns are being addressed. Ramesh Pathania/Mint
It seems from what you are saying that the government’s stand could be that there is a technical defect because this is not yet law. Is that going to be the government’s defence? And legally, how do we proceed from here?
First point, there is no question of the government of India reacting at this point of time. Parliament is still to consider the provisions. Let Parliament in its wisdom take a view. After that, whatever is the position, yes, my colleague in the department of economic affairs would examine some of the prima facie points which I mentioned to you. I mentioned because I had an occasion to have a look at the treaty.
Foreign institutional investors (FIIs) say they are spooked by all these provisions. The finance minister is in the US, and US financial companies, the FIIs, have actually asked US treasury secretary Timothy Geithner to raise this issue with the Indian government. What is the Indian side going to do about that?
(On) FIIs who are concerned about the provisions of GAAR, on that the position is clear, that if they have invested on a long term and there is long-term capital gain, that is not subjected to tax. Their concern comes vis-à-vis short-term capital gains. Now, short-term capital gains, if they were from a place where they have their proper establishments and the actual trading is from there, there is no issue because it is a permissible arrangement. And if it is a permissible arrangement, then it is the tax treaty with our DTAA (double taxation avoidance agreements) which comes into force. The question is only where it is an impermissible arrangement. So, if, for example, their trading were being conducted from New York and after investing in the Indian stock exchange they on paper show it as having being conducted through a country A or B, and then try and misuse the tax treaty provisions with that country, then it is an impermissible arrangement if in that country they have only a post office (PO) box address.
In the past few weeks, many FIIs have come and met you, as well as the joint secretary in your department? How many of them are genuine FIIs and how many of them are “post boxes”?
GAAR is not directed at the FIIs or any international investors or against any particular country. That is absolutely wrong. GAAR are general anti-avoidance rules which would be attracted with reference to any tax payee who is liable to pay tax in India and for some impermissible arrangement who is seeking to avoid or reduce the tax. So it is applicable equally even to Indian domestic companies. So that point should be clear. It is not targeted against FIIs or against any particular country. Having said that, yes, FIIs have had meetings with us and they have expressed the concerns where frankly they have admitted that some of them are post office box companies and they have frankly admitted that, yes, they are currently routing it from there, and my straight answer was if you are impermissible and you know that you are impermissible, then kindly make yourself permissible. Then they had a concern that if they make themselves permissible now, then the provisions of GAAR are worded in a way that, that arrangement now would still be hit because part tax benefit would be the motive. We told them to have no concern on that. Those concerns we will take care of, you need to be genuinely doing your business from the place from where you are stating that you are doing.
And let me be frank. You mention Mauritius. The Mauritius government has been assuring India that it will not allow misuse of the treaty, so clearly if there is a PO box and there is no genuine establishment, then that is misuse of the treaty. So if misuse of treaty is there, then that would be covered by GAAR. If there is a permanent establishment and they are genuinely doing trading from there, then they are permissible. GAAR is not in vogue and it is the DTAA which comes into play.
Markets haven’t actually done too badly, perhaps because it’s just one-tenth of the FIIs who could be impacted because of these regulations. Would that be your assessment and is that one reason why the government is very clear that it wants no dilution of GAAR provisions?
Let me say that initially they had more concerns. During discussions with us, they pointed out that they have a concern that if they are impermissible, would the assessments be opened for the previous six years, as is the provision in the income tax of limitation of six years? We pointed out quite clearly to them that GAAR is going to become applicable for income which arises with effect from 1 April 2012. So income pertaining to the previous period will not be covered under GAAR and will not be examined under GAAR. Thereafter, they also raised issues that I mentioned regarding some clauses. So what we then requested them was that why don’t you associate with our GAAR rules committee because for that we are already doing some preparatory work for ensuring that the GAAR rules are notified as soon as the Finance Bill is passed. The FIIs participated in three meetings of that rule committee, their concerns were indicated, those concerns we are suitably addressing. Finally, some of them also raised a point that, okay, if we are impermissible and if we are then liable to tax and we pay the short-term capital gains tax, then GAAR should not be applicable. Obviously, this stems from their concern that if they are impermissible, then they would be liable to tax and interest and penalty. We clarified to them that once tax is paid, then there is no anti-avoidance of tax and GAAR does not come into the picture... We would clarify also that if tax is paid, then GAAR cannot be involved.
Would you agree that the Finance Bill, for the first time in many years, arms tax authorities with draconian powers?
If you are referring primarily to GAAR, that it gives unbridled authority, then that is not correct. A lot of safeguards have been provided in GAAR. First and foremost is the assessing officer; the onus is on him to prove that it is an impermissible arrangement, which is not an easy task because he has to get proofs that an arrangement in a foreign country or anywhere else is impermissible. So assuming he gets that, he also has to prove that, yes, taxation is the major aspect.
Now so far the wording tends to indicate that tax benefit is an issue of onus which is there on the assessee. The parliamentary standing committee has also recommended that the onus should also be vis-à-vis the department, that’s an issue we are examining, we are seeing how we can address it. But once the assessing officer comes to a conclusion that GAAR needs to be in vogue, he has to take the permission of the commissioner, the commissioner would give notice to the assessee, look at all the proof which is there, and then come to a conclusion whether GAAR is to be invoked or not. If he says that GAAR is not to be invoked, then the matter is over, the department cannot appeal. If he comes to the conclusion that GAAR needs to be invoked, he has to then refer it to a GAAR panel, which is a panel of three senior officials of chief commissioner or commissioner level, not including the jurisdictional commissioner. And that GAAR panel is to again take a view whether GAAR needs to be invoked in terms of impermissibility and the tax avoidance. The standing committee has also said there have been representations that in the GAAR panel there should be at least some independent person from outside the tax department. That is again a concern we are examining and we will see how best we can address that.
You will include that independent person as a third party?
(It’s) not for me to say at this stage; that is to be seen in the Finance Bill. But we are seeing how to address that issue. But again, if the GAAR panel again comes to a conclusion that GAAR need not be invoked, then the department cannot appeal. But if the GAAR panel comes to a conclusion that GAAR has to be invoked, then the individual assessee has a full right to appeal.