3-yr GAAR delay big deal, report pragmatic: PwC

The recommendations on GAAR made by Shome panel  has been well received across industries. Speaking to CNBC-TV18, Ketan Dalal of PwC lauded the recommendations saying it is the most pragmatic report designed to draw investments from FIIs.

Also read: GAAR deferment: Govt going all out to please FIIs Below is the edited transcript of the interview Q: Would you say that the biggest takeaway appears to be the deferment itself – will it mollify sentiments enough or will the fact that the sword is still hanging be a dampener? A: There has already been a deferment for one year till 2013. Now the deferment is till 2016-2017 financial year. It is a very significant time. The gap is quite significant so, while yes, there is always that fear that one day it will come, I think the gap and the time is good enough and long enough for people to get use to it for the necessary safeguards to be built, many of which has already been suggested by the committee in its very pragmatic report. Overall, it is a very good thing. I think it is a big deal. Q: What about grandfathering? Will the new anti-avoidance rules will only apply to prospective investments? A: One has to see the recommendations in  itstotality. If listed securities are ultimately going to be totally exempt, if the deferment of GAAR is anyway till financial year 2016-2017, then the importance of that is somewhat diluted. But by itself, I think it is important because the committee has recommended that all existing investments will be grandfathered. So let us say the deferment is not accepted or let us say the deferment is till ’15 (and I do not see any reason why that should be but let us assume so), then the time gap is shorter and the grandfathering might have greater relevance. The longer it is, the lesser isthe relevance. But still I think it is a very sound recommendation. Q: Which according to you are the other recommendations that could be very important from an investor stand point; especially the ones that seek to remove arbitrariness in tax administration – after all the administration is known for harassment? A: I think there are two or three parts to this. One, if you look at it from a macro stand point, then the fact is that they have dealt with certain concepts in a very fundamental manner, very holistic manner. For instance, the distinction between tax avoidance and tax mitigation has been brought out and they have mentioned that tax mitigation should not be frowned upon. For example if you have a choice between two methodsin a commercially justifiable transaction and you adopt the one which is giving you a lesser tax burden, wouldn’t you do that? It is just like choosing a road which has lesser traffic. So there is nothing wrong provided that the destination was something that was commercially justifiable so that is one part. Secondly it is a very important recommendation that the GAAR panel should have external people, people from accountancy, economics, business and I think it is extremely important recommendation because as the committee itself has said ‘GAAR is not a revenue collection mechanism, it is a deterrent mechanism’. When you have a committee which is broad based and has a strong business flavour to it – that in itself is a substantial safeguard. _PAGEBREAK_ Q: Any sort of clarification at all on the retrospective applicability of rules, possibly on indirect transfer of assets like the Vodafone case. Has that been brought up at all? A: No, I think first of all you remember that this was the GAAR panel and indirect transfer is not really a GAAR issue. But I think the mandate of the committee was intended to be expanded and in fact I understand there was also some pronouncement that it has now been formally extended to the indirect transfer issue and I think by end of September some recommendations on that also will emerge. Q: On the abolition of capital gains on listed securities altogether, this has been suggested for the longest time, but there is one socialistic or an equity argument against it. For instance a widow selling her husband’s house to live off it pays capital gains, but a broker who probably is making money much faster is not paying any capital gains at all. Where do you stand on this recommendation? A: I think there is a larger issue there. Why are we even talking of exemption? If you talk of long-term capital gains being taxed at a more concessional rate, the argument that it can perhaps be extended to that as well. So yes, on the one hand, is it fully equitable, may not be if you look at it from a socialistic kind of angle. But we have to recognize the fact today that the economy is not in a state where international investors are looking at it favorably. Why did we have a Mauritius Tax Exemption in the year 1991-92 in the first place? Why did we allow FIIs to enter in the first place? The fact of the matter is that one has to look at the reality on the ground and the reality on the ground is that we do need international investments of significant numbers on an ongoing basis and the time has not come to say that look they don’t have any option, because honestly they do and they have exercised that option as you know in the past few months and we have seen that. I know that inflows have come in regardless, but remember those inflows came out after a lot of it was pulled out. So it was more like a neutralization.
Q: There also seems to be a lot of clarifications on commercial substance. Are these clarifications genuinely reducing the uncertainty or do you think that they will open up a possibility for more litigation? What would your comments be on these? A: At the end of the day, one is talking about something called an impermissible avoidance arrangement. You are talking of relatively fuzzy concepts like commercial substance, justifiable and things like that. So you will never be able to get a complete objectivity in what is essentially a subjective concept. I think an attempt to define commercial substance and at least narrow down the fuzziness — also ring fence the definition of connected persons into something which is more easily understandable and defined in the Income Tax Act associated persons etc — are very laudable steps.
Q: Dr Shome has also invited comments from affected parties at this point in time. What exactly do you think he will be recommending in terms of needed or further tweaking at this point? A: Honestly this is one of the few reports. It’s not that there will be nothing and we will of course have a look at the fine print. Remember it’s a 109 page report and as we speak we are going through it and there will always be a few things that we will need to talk about and of course on the indirect transfer which has not yet emerged as opposed to what has already emerged, but there is honestly relatively little to recommend in this report. This is one of the most balanced and pragmatic report that at least I have seen for quite sometime.