Tinge of subjectivity could limit GAAR team:PwC

The Prime Minister has assured of doing away with arbitrariness in the tax system. Within a fortnight of the finance ministry issuing draft guidelines on GAAR, Prime Minister Manmohan Singh on Friday set up a committee to prepare fresh norms on the controversial tax provision to bring "greater clarity" and prepare a roadmap by September 30 that will enable implementation.

Ketan Dalal of  PricewaterhouseCoopers (PwC) analyses, on CNBC-TV18, the initiative and its implications on various aspects of the economy. Below is an edited transcript of the analysis. Also read: PM sets up committee to frame GAAR guidelines by Sept 30 Q: What would you read into this announcement itself?
A: I am not exactly aware of the constitution of the committee, but I understand that Dr Shome and Dr Ajay Shah are part of the initiative and this is an indication of the calibre of other experts selected for the committee.
This increases the hope that the arbitrariness will be reduced. However, a key caveat of concern is that GAAR is inherently arbitrary because there is a lot of subjectivity with terms like "commercial substance".
This element of subjectivity adds limitations on what a committee can do to dilute that unless the concept of GAAR itself is substantially defined. I an not sure how the committee will be able to do that.
We already have special anti-avoidance rules that are adequate for India at this stage of the economic situation and at least for the next few years ahead. Q: There have been clarifications from the PMO earlier regarding GAAR. What do you think remains to be clarified? Can you list any pointers that will provide significant relief to investors?
A: The key problem is that GAAR is inherently very subjective and we cannot compare the GAAR in India with that in New Zealand. The number of times and the circumstances under which it has been invoked, are very limited. Q: So, a definition of the interpretation is what you would expect to be positive for investors?
A: I think it's not only a defining of the interpretation, but also of the language used. Q: Is there anything you look forward from this draft in terms of its applicability to FIIs? Montek Singh Ahluwalia has issued a statement that GAAR should not be applicable to FIIs at all.
A: The way GAAR is drafted, it is not linked to FIIs. It is applicable to all domestic and international transactions. From an FII standpoint, the government has overtly indicated that it is trying to attack through GAAR what is actually allowed by a treaty.
The treaty is to be amended in a phased manner over a period. But a backdoor attack on terms that are already etched in a treaty is causing a lot of uncertainty which is not good either for the economy or the markets.