GAAR may be dropped, business firms welcome move

A clarification circular on the retrospective amendment of section 9 is soon expected from the Finance Ministry. The general anti-avoidance rules (GAAR), for now, is likely to be stalled and the government may push it beyond the 2014 elections or completely drop it. 

Section 9 threw light on the indirect transfer of assets clause which said indirect transfer will be taxed in cases where substantial value is derived from underlying assets in India. The government is likely to either remove or keep the unintended consequences of this section. 
HP Ranina, Corporate Tax Lawyer is of the view that this development is a direct fall out of the Prime Minister taking over the Finance Ministry after Pranab Mukherjee’s resignation. He reiterates the fact that Manmohan Singh had assured the British Prime Minister about not interfering in court decisions or taking up anything that will have a retrospective effect.
Ranina further adds that now, the Prime Minister will be keen to uphold the Vodafone case in an effort to send out the right signal to investors, suggesting that India will uphold the rule of law and respect the Supreme Court's verdict.
While business firms Nishith Desai Associates are quite happy with this development. Nishith Desai, Founder of Nishith Desai Associates feels that there are a number of provisions in the Direct Taxes Code which has been proposed and a thorough re-look is necessary before implementing the GAAR.
The possibility of deferring GAAR is also being considered a welcome move by Dinesh Kanabar, Deputy CEO of KPMG. He believes, all the uncertainty surrounding GAAR was dampening foreign investment to the country and this can lead to positive sentiment building.  Below is the edited transcript of the interview with CNBC-TV18. Also watch the accompanying videos. Q: The two key things that we are picking up from the finance ministry sources is one is that the finance ministry is trying to take the sting out of section 9. So, the unintended consequences of section 9 are likely to be removed. In direct share transfer, listed companies are also going to be removed and they are going to come out with a lot of clarifications and they might even consider deferring it. What have you made of this latest news and what this means for India Inc? Ranina: This is a direct fall out of the change of guard at the finance ministry in the sense that the prime minister has now taken over the finance ministry and as you are aware the prime minister had assured the British prime minister few months ago that he will not do anything with retrospective effect. That he will not try to undo any court decisions.
So, what I see is that the government is now keen on upholding this Supreme Court verdict on the Vodafone case and making sure that, that verdict stands and the legislative amendment introduced by the Finance Act of 2012 does not override the judicial decision. So, it is to send out the right signal to investors that India will uphold the rule of law and respect the Supreme Court’s verdict. This is the real message behind this clarification. Q: So that means Vodafone like cases will not come under the ambit of GAAR but we also understand that p-notes as well are going to be kept out of the tax net. If GAAR does come through then what type of cases will be under the ambit of GAAR now? Ranina: No, as you know GAAR in any case has been deffered to next financial year. It is not coming into effect at all this year and the government had promised that they would introduce certain guidelines as and when GAAR is to be introduced. So GAAR is kept in the cold storage for the time being. Therefore, I do not expect any type of change to affect FIIs or p-notes or any other institution. Q: There is now talk that there is a thought in the Finance Ministry of perhaps delaying the implementation of GAAR by one year to 2014. What do you make of that move? Desai: Yes, I think that’s a great news, because I think the whole world is waiting for this retroactive amendment, indirect transfer and the GAAR to go and these are two major issues with our tax laws at this point in time. I am sure that that will lift the sentiments, but to really do a good job, there are a number of other provisions in the Direct Taxes Code that has been proposed.
We will have to completely relook at the number of provisions that are unconstitutional, extraterritorial, not in conformity with international law or Committee of Nations. There are a number of provisions which have to be looked at. That is what my immediate reaction is, but this is a great news. Q:This is only going to be a clarification. It does not mean that GAAR is going away or that retrospective tax amendments are going away. Its very much going to be here, perhaps just delayed by one year when we are talking about GAAR. But when we talk about retrospective tax amendments there could be some clarification, what are some of the kind of clarifications you would like to see? Desai: The whole section has so many issues around it. It will have to be completely revisited. It is not only listed companies. For example, any foreigner holding shares of a foreign company wants to pledge shares to buy his house, under this if you create any interest in foreign share security in a company with some kind of interest in India that is also covered under the section.
So, foreign banks will have to withhold tax while making a loan. There are many issues like that and therefore, it will have to be completely revisited. Besides, the foreign mutual funds have a problem and the pledging of shares and all those kind of things will be affected. So, it is mindless. Q: What do you make of this move, just yesterday, the Prime Minister on his day one as a new Finance Minister had said in that press release that there are lot of tax issues, which needs to be resolved. Now the news coming out exclusively at CNBC-TV18 that the implementation of GAAR maybe delayed by one year, what do you make of that? Kanabar: First the fact that the Prime Minister acting as a Finance Minister identified tax as a key issue. This is indeed welcome because there has been a huge amount of negativity around several of the tax proposals contained in the Finance Bill 2012.
I think there has always been a representation that India does not need a GAAR. There would rather be specific anti-avoidance regulations like dividend stripping etc than to have general things, which is prone to a very subjective interpretation because what constitutes lack of substance, what constitutes abuse of law, which are the terms used in GAAR indeed can lead to a lot of litigation and uncertainty. That is what is dampening any foreign investment into the country. So that will be a very welcome step.
To my knowledge, there indeed was a committee which was reviewing rules for GAAR and they were about to be rolled out. If that is stopped, it’s a very welcome move. Q: I want to ask you about the section 9 retrospective amendment and the growing sense in the Finance Ministry is that, they did not realize the several unintended consequences which the word 'indirect transfer' would have. So what would be primary concerns in terms of M&A deals, in terms of intergroup transfers with underlying assets in India and what are the kinds of clarifications that you would expect on these? Kanabar: There are several of them. For example, as of today the way the section is worded first of all does not define what is a substantial value in India. Assuming for a moment that it is defined, there is not even a provision for a proration. Let us assume for a moment that substantial was defined as majority and assume that those are companies which had 60% value in India and 40% outside. The way the section is worded today, all the gains are liable to tax in India, which obviously cannot be the intention.
There are also issues on a fund structure where there can be multiple layers of taxation. One, a taxation at tier I when a redemption of units happen with tier II. Again, there is no provision to deal with that situation. We then have internal reorganizations where there is no shift of value anywhere. There is no third party coming in and they potentially could get impacted.
Finally, we have a listed company where again there is no provision whatsoever that those would be exempted. So the Vednata’s of the world, WNS etc would get taxed for transactions overseas. Q: What about indirect transfers where the shares are on a listed stock exchange? Do you expect change in the treatment, tax treatment there? Kanabar: The question, which you are asking is actually not a very simple answer to give because we already have a law in place and the question is what is it that you can do today to bring about certainty. That is what everyone is looking at.
There are a few things where a notification can indeed be issued and a clarification issued. But, there are certain things where the law itself will need to be amended. For example, when we say that there is going to be an exemption for listed companies that needs to be somewhere built into the law.
One will have to wait and see what is it that the Prime Minister will do to ensure that the law is amended and carried through in a manner that the retrospectivity or the rigours are taken out.