New GAAR guidelines omit Mauritius, Vodoafone :PwC

Even as the Prime Minister is yet to endorse the draft guidelines on the General Anti-Avoidance Rule (GAAR), market players have got a little ahead of themselves by thinking that those are the final guidelines.

While Ketan Dalal, joint leader, tax and regulatory services, PwC does not see the GAAR being scrapped, he said that the position on GAAR remains unchanged post the draft guidelines as the market still needs clarity on specific issues. Dalal clarified that there is no mention of Mauritius in the examples provided in the draft and that the language used in the GAAR regulations is too subjective.
Dalal anticipates some mitigating factors in the final draft for marginal cases. In his view, a positive clarification with respect to the Vodafone case will offer a significant relief. Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more. Q: Will there be significant changes to the draft guidelines which have been floated? The news is that the PM has not seen it yet, and only after he endorses it, will it become final note. What are your observations of what you have seen so far?
A: The draft guidelines do not say much which is new. In fact they have given 21 examples and some of the examples do not refer to Mauritius. For example, they seem to indicate a holding company without substance etc. I think the way it is worded; I don’t think we are in any different position from what we were a month or two ago.
There is reference that if there is a holding company or an investing company without commercial substance the GAAR provisions will apply. So both from an FII and from a private equity standpoint, I think the position is the same. So I think there has been much ado about nothing, and perhaps in a sense, not even all that positive. Q: Which way do you think this is going to work out? Will there be more tangible guidelines or details on the contours of GAAR? Or do you think it is more likely as it was talked about yesterday that this gets pushed back by an additional year that is it goes into cold storage till 2014?
A: As the guidelines have been framed, it clearly says that it applies to all incomes arising on or after April 1, 2013, which is exactly what was clarified last month. So the postponement from 2012 to 2013 is a reality that shows up in the Act and also shows up in the draft guidelines. But there is no reference to postponement to 2014. One wishes that were to be so but it is not, as we see it in the draft guidelines. Q: Can one infer from the draft that they are trying to make in position of GAAR treaties as non-discretionary as possible by forming teams or panels which are fairly neutral, broadly spread out; reducing or mitigating to a certain extent the possibility of harassment or do you think that is too positive a inference to draw at this stage?
A: I think that is too positive an inference. We need to bear in mind two points. Firstly, GAAR by itself is so discretionary; if you look at words like ‘lack commercial substance’, ‘bonafide’ who is to decide all this? That is one broad point.
The ground reality that we have in India which has two dimensions that discretion is often used very sweepingly. When that discretion is combined with such language, it will be even more so. Second and equally important is that the process of resolving a dispute takes years, sometimes decades. If you combine all this, what they have tried to do is somewhat mitigate the issue but it is really not going to be substantive.
_PAGEBREAK_ Q: There also seem to be a suggestion yesterday that there would be some kind of money line drawn through this as well, that deals of a certain size would be open to any kind of scrutiny for GAAR. Do you expect that to happen? Or do think this will be wide ranged in terms of the size of deals we are talking about?
A: I think that will happen, the draft guidelines does contain a paragraph saying it will apply to transactions “where tax benefit is ____” so they clearly want to put something there. But it depends on what the monetary limit is, if it is a very small limit. They could come up with a limit of, for example, Rs 10 lakh that is neither here nor there, from a stock market perspective and a foreign investor perspective.
Ofcourse, it may have a mitigating factor so far as small businesses are concerned. But one must remember that GAAR is not for cross boarder transaction, it is also for domestic transaction. So it will have some mitigating factor for what I would call marginal faces. But from the perspective of viewers of this channel, it would have any material implication. Unless of course they say it applies to transaction which has tax implication of Rs 25 crore for example. Q: There has been some talk as well that the government or the Prime Minister may relook at the Vodafone case and retrospective tax levies. Are you hopeful that such a relook is possible and they can do a complete U-turn on that?
A: I don’t know what will happen. I do wish they do relook at it. In fact, there was some suggestion yesterday that it would be a huge back down for the government, it would be an embarrassment. I think the point is it is better to face an embarrassment for 2-3 days if at all there is an embarrassment rather than have the huge dent to credibility that has already happened continue to linger for months, if not years.
To my mind, a reversal of that would probably send a very strong signal because clearly something which has been fought in the courts for five years and then a favorable decision for the tax payer has come out with retrospective effect is clearly not, as we all know, has sent a very negative signal. So I don’t know what will happen but I do wish that they neutralize that. Q: What is the probability that GAAR is completely scrapped because it has also been a well known fact the Prime Minister and the former finance minister had stark difference of opinion on this whole retrospective tax issue?
A: From what I am hearing in the circles and noises in the government itself also, I do not think they will be able now at this stage to scrape GAAR. I doubt whether they will be able to do it. They have made some attempts in this draft guidelines and one wishes that even these become stronger in terms of mitigating the potential pain. Unfortunately, we will have to live with GAAR. The issue is the monetary limit and there have to be strong fetters on invocation. You mentioned about the panel, but the panel again comprises of people from the government and they do not comprise of economists or people from industry etc. My concern is that the invocation fetters and invocation threshold in a manner of speaking, will be low.
I am worried that regardless of the intent to provide certainty and clarity, it is this one single provision that can cause years and years of litigation on many matters for many companies and not just cross borders, not just FIIs, not just private equity but across the board.