GAAR provisions positive for large stakeholders: KPMG

In an interview to CNBC-TV18, Bhavna Doshi of KPMG reacts to the Finance Minsiter's defering the GAAR (General Anti-Avoidance Rules) aimed at curbing tax evasion, to April 2016.

Doshi says GAAR's defering is 'welcome move' on the part of government. "This is giving a very positive signal to the large stakeholders. We are telling them in advance that this is going to be the position, this is how tax laws will be applied in the country, the tax liabilty and that it will start from 2016," she says.

Q: Where do Participatory Notes (P Notes) fall because that was the big bone of contention or the big area that led to the whole idea being postponed at least to 2014? So are now P Notes to be brought within the tax net at all? How have you understood the rules?
A: In the announcement made by the Finance Minister (FM), he has clarified that the investors who come through Foreign Institutional Investors (FIIs) would not be subject to the General Anti Avoidance Rule (GAAR) provisions. So any participant in that note which has been issued by FII would not be subjected to GAAR provisions. Q: What about proprietary funds of FIIs?
A: Yes, the funds themselves would be subjected to GAAR provisions. It is a very welcome move on the part of government to have accepted majority of the recommendations of the committee. This is giving a very positive signal to the large stakeholders. We are telling them in advance that this is going to be the position, this is how tax laws will be applied in the country, the tax liabilty and that it will start from 2016. So, three years in advance and in a sense, it is really five years in advance because in 2010 there was clearly an indication that this is how we are going to move. Q: Are there any sort of changes in terms of allocation of portfolios or any changes in terms of what the FIIs could do from now on to 2016 despite the fact that there were a lot of changes and shift towards Singapore etc which already took place from the Budget last year up to now. Do you think there could be more changes now that the final GAAR recommendations have come through and have been cemented?
A: In a sense, now all of them would be very clear that the GAAR provisions will apply even if there is treaty. We will have to wait and watch how the guidelines come in. However, one part of the Shome Committees recommendation has not yet been commented upon by government and that relates to the capital gains. That is one area which still concerns the foreign investors. The question arising is whether the gain would be taxed as short-term gain or a business transaction, whether it would give rise to PE or not? And that is why, in the Shome Committee they had recommended that this is an aspect which needs to be looked at. They had also recommended that it should be exempted.
They had suggested that till such time that a decision on that is taken, the circular which said that the tax residency certificate should be accepted, that aspect has not been dealt with, yesterday by the FM. Therefore, the FIIs and other investors will need to wait a little more to see what view the FM finally takes. That would then really decide their strategy. Q: There is no mention at all anywhere of the tax residency certificate as being sufficient to claim non-taxability in India.
A: Exactly, it’s not mentioned. That’s one area which will have to be looked into. The government perhaps thinks that they may not want to simply recognise the tax residency certificate. They would like to look into the panel and then they will come to an informed decision whether a mere tax residency certificate is adequate or something more will be required to prove the commercial substance of any arrangement, any transaction, any investment that is taking place.
There are two areas which one needs to look at and perhaps the government would also look at the representations. One is that the approving panel’s decision will be binding, not only on the tax authorities, which it should be, but it will also be binding the assesses. This means that if the panel comes to a conclusion that an arrangement is impermissible arrangement, then assesses will not have the ability to go in for appeal against it.
The only option would be to file writ, which would mean that if they do not agree or if the panel hasn’t appreciated their point of view and if they want to challenge it , they will have to go in writ. So, the right of appeal of assesses is being taken away. One could argue that we also have advance ruling authority but advance ruling authority is voluntary. I have a choice whether I go to advance ruling authority or I do not, whereas so far as this panel is concerned, perhaps it is mandatory that everybody will necessarily have to go to the panel. So, that is one area which one looks for some more clarity, another area is grandfathering. All the investments upto August 30, 2010 are being grandfathered. The one issue which comes to mind is whether there are investments which are made before that or if there are various steps which are part of a whole transaction. Some may have taken place and some will take place now. So, what is being grandfathered? Hence, there also we look for some more clarity as we have further deliberations.