GAAR clarification significant relief for FIIs: Khaitan

Finance minister P Chidambaram on Monday deferred implementing the controversial general anti-avoidance rule (GAAR) to April 2016. Daksha Baxi, ED-Taxation of Khaitan & Co told CNBC-TV18 the much awaited clarification on GAAR was a significant relief for the foreign institutional investors. "I would say that it is a great relief for two years. There are a lot of opportunities for the clients to look at their structures and ensure that GAAR will not be invoked at the time when they do exit," explained Baxi. She feels there is a need for actual implementation of the changes in the law recommended by the Shome committee.

Besides, Baxi is of the view that foreign investors claiming a treaty benefit may also be subject to GAAR and this could prove to be a negative point. But, she believes strengthening of the Authority for Advance Rulings (AAR) mechanism to give quick rulings on matters related to GAAR is a positive move forward. On the whole, the rulings related to GAAR have paved the way towards an optimistic environment for investors, said Baxi. However, FIIs have recognised the government’s need to prevent tax evasion and “The clients are now getting very well educated to see that they appreciate the fact that there is a need for the country to try and save the tax base erosion. Therefore, they are getting smarter to arrange their affairs in such a manner that they can address GAAR as and when it becomes effective,” opined Baxi. She further mentioned that the clients are appreciating the government’s reply on the issues raised earlier. Here is the edited transcript of the interview on CNBC-TV18 Q: What did you take away from what the FM had to say, any further fine print that you need or is the monkey off your clients’ back for a couple of years at least? A: I would say that it is a great relief for two years. There are a lot of opportunities for the clients to look at their structures and ensure that GAAR will not be invoked at the time when they do exit. Yes, we do need to see how much of the final report of the Shome committee is going to be put in the law by way of changes in the law as well as by way of the guidelines for invocation of GAAR. There are a few very good reliefs which have already been announced by the FM. For example, the first one being the extension or pushing back of the invocation of GAAR or application of GAAR till 2016. The other one being the fact that there will be grandfathering, though the date is August 30, 2010 rather than March 31, 2014 or 2015. Still it is something which is much more palatable and it sends out much better signals to the investors. A little bit of a disappointment there in terms of foreign institutional investors (FIIs). If they are claiming a treaty benefit then it says that the GAAR maybe looked at. That means that if an FII is investing from Mauritius or Cyprus or Singapore and if they claim the treaty benefit, they are prone to invocation of GAAR. Of course now you have Authority for Advance Rulings (AAR) to approach to figure out whether GAAR is applicable or not. The fact that they are also strengthening the AAR mechanism to give the rulings quickly enough is also important. Another thing which is very good is that they have accepted to have a total outsider in the approving panel. A word of caution there is that earlier the approval panels’ ruling was binding only on the tax authorities and now it is binding on both the taxpayer and the tax authorities. That means that if either of them finds it not to be appropriate, then probably the only remedy left is under the constitution of India, which is either a writ before the High Court (HC) or a special leave petition before the Supreme Court (SC). So, it is a mixed bag but, overall I would say it is positive. _PAGEBREAK_ Q: They have recommended to abolish the tax on gains arising from transfer of listed securities, whether it is capital gains or business income. What is your sense of what the government’s response is to that one? A: The FM was silent in his press note about that issue. So, silence cannot be taken as something which they have accepted. Therefore, I am inclined to think that it is not a recommendation which has been accepted. Though, we will need to wait and watch. If it is accepted, it is definitely very good for the secondary markets. Of course the taxation outside the stock exchange transaction will continue to remain. However, on the stock exchange itself, if this kind of a relief is made available, it is something very good. We will have to wait and watch. Q: First response, of course when GAAR came out was that a lot of flows would get held back because of this tax evasion versus mitigation question mark. Has that been cleared up in your interaction with clients, are they feeling free now in terms of investing aside from the fact that it may come back two years later in some form? A: The clients are now getting very well educated to see that they appreciate the fact that there is a need for the country to try and save the tax base erosion. Therefore, they are getting smarter to arrange their affairs in such a manner that they can address GAAR as and when it becomes effective. I would not say that they have all reorganized their affairs but, they are towards organizing their affairs in the manner that they can address GAAR. Let me just add here that something that happened in the UK where Starbucks was made to pay moral taxes is something which is helping India, at least that is not the kind of thing that is happening in India.