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Business News/ Politics / News/  Parthasarathi Shome | We have to go back to a rules-based regime
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Parthasarathi Shome | We have to go back to a rules-based regime

Parthasarathi Shome | We have to go back to a rules-based regime

Parthasarathi Shome, former Director & Chief Executive, ICRIER. Photo:Pradeep Gaur/MintPremium

Parthasarathi Shome, former Director & Chief Executive, ICRIER. Photo:Pradeep Gaur/Mint

New Delhi:There are many ways of introducing Parthasarathi Shome. Most recently he was director and chief executive of the Indian Council for Research on International Economic Relations (ICRIER)—a job he relinquished on 1 September. Co-convenor of a panel that prepared the first report on the goods and services tax, Shome was tapped by finance minister P. Chidambaram just before the latter took charge at North Block, and given the task of reviewing the general anti avoidance rules (GAAR)—the existing draft version of which had spooked foreign investors.

GAAR was aimed at cracking down on transactions designed to avoid tax. In an interview after submitting his report on GAAR, which suggested deferring the regime for three years and proposed significant dilutions, Shome spoke about the thoughts that shaped the proposals and the urgent need to signal to the world that India was committed to a rules-based regime. Edited excerpts:

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Mint’s Anil Padmanabhan asks Parthasarathi Shome about the thoughts that shaped the panel’s proposals and the urgent need to signal to the world that India is committed to a rules-based regime

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You have completely reworked the GAAR guidelines as we knew them a few months back. What is the big thought that drove such a radical change?

We in the committee did not start off thinking that we will come with a radical change. Neither did I myself personally see it as driving a radical change. It appears that that is the assessment.

We took it as a tax matter and looked at the international experiences of how GAAR has been prepared and then implemented. Since this is an international taxation matter, we thought we should make it comparable to those experiences. We also looked at how in the 2009 DTC (direct taxes code) some of these matters were considered. We did not necessarily bring those back but saw what was the motivation behind them. We went further and reflected at the international experiences for the last four years and made the recommendations.

You have given tax mitigation a respectable framework. In the previous avatar, tax planning was viewed as tax evasion. Thoughts?

Parthasarathi Shome, former Director & Chief Executive, ICRIER. Photo:Pradeep Gaur/Mint

In between is the grey area that is tax avoidance, which in the letter of law or in its form is legal but it is clearly very different from the original intent of the legislation. It becomes obvious only through fine examination and that is where GAAR comes in. GAAR will say that this is acceptable tax avoidance because there is not just the form but there is substance also. But if it is just form—that is something that has been set up just for tax benefit and there is very little substance in it—then that will come under GAAR.

FIIs (foreign institutional investors) seem to have been favoured over FDI (foreign direct investment). What was the rationale behind giving greater preference to FIIs?

FDI issues will come through in our second report in a way. Indirect transfer, some of it, will be in the form of FDI. So we will be looking at FDI in that part. FDI is a little more complex. FIIs are collecting money from small investors. You have a holding company and either you bring the money in or out.

In FDI, large institutions are involved. Then there is the question of whether is it direct investment. If it comes through shares, like in the case of Vodafone, is it FDI? Some people do not consider it as FDI but some people do. You have to look into all this. The components of FDI are a bit different from that of FII.

Are you saying that the Mauritius circular (by the Central Board of Direct Taxes that exempts capital gains under the India-Mauritius tax treaty) should prevail?

The Mauritius circular is part of a treaty. The OECD (Organization for Economic Co-operation and Development) convention says that if there is an anti-avoidance aspect in the treaty, then the treaty prevails. If there is no anti-avoidance, then the domestic law will prevail. Since the tax residency certificate is there in the India-Mauritius treaty, we are saying that it should prevail.

There has been a lot of destabilization of Indian policy in the eyes of the foreign investor. Were you looking to send this message out that India is a rules-based society?

There was an imperative in the committee that we want to establish a recommendation that we have to go back to a rules-based regime, which will bring in certainty. It is not only for foreign investors but also for domestic investors. Many domestic investors who usually are very reticent in speaking out have actually come forward and mentioned the uncertain environment. It is for all the stakeholders but it is all in the context of providing less risk, more certainty and a level playing field emanating from rules, treaties and adherence to understandings.

You have drawn from the Supreme Court verdict in the Vodafone case where they have said that timing, payment of taxes and exit route are relevant to establish substance while assessing alleged tax evasion. In a sense, you are giving a bridge to the new regime in North Block to rebuild burnt bridges. Fair thought?

We didn’t link it to the Supreme Court judgement but we took some of the language from there because that would be easily understood. We actually looked at comparative cases in other countries and some of the pillars of economic substance like arrangements, how long have you been here, how long have you paid tax, if you have some arrangement for exit. These are ingredients that some of the other jurisdictions have also incorporated while looking at GAAR. We have said that these are not exclusive. But in a holistic sense you have to consider them that it is just a tax benefit kind of arrangement or whether it had other economic motivation and substance in it.

Is your proposal on mergers and amalgamations between intra-group and among companies a recognition that corporate India or those who want to invest in India will require a level playing field and need complete clarity on rules?

Yes, certainly. What we have said there is that if there are really no tax implications, then it doesn’t really fit into the tax benefit mode of the main purpose.

In addition, you have the ongoing corporate structures where they merge and demerge all the time. We cannot stop it. Much of it takes place abroad and impact is on India, the ramifications are here because we are part of a globalized world. If we want to be comparable, we can’t think ourselves as independent from the overall structural milieu. From where the foreign investors are coming, they are used to certain structures. We have to compete for those funds and we have to also encourage through this kind of arrangement and reassure our domestic investors who are increasingly going abroad and taking advantage of the easier structures abroad.

Which countries’ global experience influenced these guidelines the most?

We have looked at Australia, the US, the UK, South Africa. South Africa has very recently introduced it. UK has a framework but it has taken four years to develop the framework. It has been placed in Parliament now and in consultation for one year. We have blended them to fit our needs. And we have also looked at 2009 (at the DTC) on how we started.

The approving panel will have two members who are from outside the government. In a statutory body this is a first. Do you think India is ready for such a radical change?

Yes, I think so. What we have suggested is that the external members should be knowledgeable in income-tax matters and they will come from very specific fields like economics and accountancy. The chairman will be a high court judge. And we have said that there will be two chief commissioners of income tax. This is a very well thought out mix.

The rationale is impeccable. But how do you prevent an IAS (Indian administrative service) capture?

I don’t think that we had any motive like this. It was just that the components we felt needed very specialized field. Therefore we narrowed it very specifically on who should be represented on the panel.

One of the criticisms that have emerged is the withholding tax on payments to foreigners. The fear is that it will lead to more engagement with the administration which we all know is not a good thing in India. How do you propose to address it?

The motivation was that from an administrative point of view we were trying to put some safeguards for the tax administrator. Let’s say the withholder is in India and the withholdee goes away and the assessment comes a year or two later. If at that time a withholder is told that GAAR is applicable, the withholder may say that the company has gone somewhere and we don’t know where they are. In order to safeguard and ring-fence against that possibility, we are saying that the withholder should give some kind of guarantee that if some GAAR issue comes in the future, they will take responsibility for it.

If this is the kind of assurance given by the withholder, then you are minimizing GAAR cases in a way. The withholder will be careful about withholding and in the pre-contract stage itself, they will be able to negotiate this understanding.

Your term as director of ICRIER has come to an end. What are your future plans?

I have given up the directorship and chief executiveship because I felt that compared to when I came and at this point, ICRIER’s position in terms of its finances and in terms of the research projects that we have is very good. We have many new research projects. I myself have started and am conducting two large projects in the areas of taxation in the context of competitiveness. How taxation affects competitiveness.

One is the survey of compliance costs. It is a large survey that we have to conduct. It will take a very intrinsic effort. So I want to focus on that. I will be hanging around here I suppose and doing those projects. The other one is a new concept and delves on growing dialogue between tax administrators and stakeholders, which is not the usual culture. Several research papers will be written by tax administrators and academic researchers.

remya.n@livemint.com

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Published: 05 Sep 2012, 01:10 AM IST
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