FM could have done more on GAAR: ALMT Legal

Yesterday, the Finance Minister (FM) announced that the General Anti-Avoidance Rule (GAAR) will now become effective from next year.

In an interview to CNBC-TV18, Aliff Fazelbhoy, partner-tax, M&A and employment of ALMT Legal says, whilst the FM has done a lot of good things, there is some confusion; he could have done more on the GAAR. Also read: Deferment of GAAR offers only short term relief, says PwC Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video. Q: What happens basically to the FIIs? Does it become life as usual? Do we start seeing a resurgence of the issue of participatory notes? A: I would think so. I think people have been given ten months time to plan. They will know what is coming in store next year. But whilst the FM has done a lot of good things, there is some confusion; he could have done more on the GAAR. For example, it was supposed to come in as part of the direct tax code (DTC), which is now pushed back to 2013. The provisions in the DTC had been widely debated and they are not as broad or as white-sweeping as what he has proposed now. So, you have two sets, you have a DTC which is to come in next year and you have a finance bill which is also to come in next year with different provisions. So, which one will apply, one hopes that the committee, which is formed, takes a pragmatic view and give some clarity on it. Q: Could you highlight some key differences between the anti-avoidance rules regime and the DTC, where is that contradiction more glaring? A: The principles are similar. But the definitions, which he has come out for, like what is lack of commercial substance or what are impermissible transactions, they are much wider in the finance bill. And then there is a provision for example 97C, it says that the location of an asset in a jurisdiction, which could give a tax benefit, makes the transaction lack of commercial substance. So, they have expanded the definitions. For example, if there were five criteria in DTC, they have made it seven. So, anything and everything could come within the scope of GAAR. Q: With regards to retrospective taxation, what was announced in terms of retrospective taxation and where does this leave the entire Vodafone tax case now? A: That is I think very confusing. I don’t think there is any clarity on this unfortunately. What the FM has said is that countries, which have a tax treaty, will not be affected, but it is not clear how that will work. For example, if there is a transfer of shares in Mauritius where there is underlying Indian assets, the parent company say a US company, now will the India-US treaty apply or the India-Mauritius treaty apply. There is no clarity on that. And then the statement comes in Vodafone will not benefit by this, but cases, which have been closed, will not be affected. So, what are closed cases? Supreme Court (SC) has closed Vodafone as far as everyone is concerned. So, can they reopen Vodafone? They are trying to. Whether they will succeed or not, I am sure it will be tested in the courts. The FM should have not made it retrospective. He should have rolled that back, continued with the DTC where the provisions are very clear and very good and everybody accepted it. We have heard that Vodafone offered to pay Rs 7,900 crore, now he should have gratefully accepted that and moved on with life and made this prospective. But let us see what happens. _PAGEBREAK_ Q: There is a committee that is expected to be set up. There is now somebody from the law ministry which is also supposed to be added so that there is more objectivity on it. In your sense, what do you think is going to come out of the committee? Is it going to be clear rules which are going to come out with perspective from the FIIs, hence we could have that implementation come through next fiscal or do you think that again is going to rumble on and there is going to be a lot of debate, but no action on it? A: I think you are talking about the GAAR. One would hope the committee comes up with clear rules because as I said, there are two conflicting proposed legislations, the DTC and the finance bill both dealing with GAAR. So, which one will be implemented, are the provisions in the DTC or the finance bill, the committee should first of all clarify that and clarify lot of concepts as to what exactly is lack of commercial substance, what is an impermissible transaction. It should bring more objectivity to it rather than leaving it. It is very subjective now because the language is so wide that anybody could interpret it the way they like. We hope the committee does bring the clarity. Q: What do you suspect foreign institutional investors operating out of Mauritius are likely to do? At the moment, is it that they would trade because the new rules don’t apply? How would they plan for March 31, 2013? A: I think if the committee report does come out as promised by May 31, which he announced yesterday then it will give ten months time for people to plan. So, once the committee report comes then they will see their strategy whether Mauritius is still viable, whether they should move to another jurisdiction. Now, they have reduced the short-term capital gains to 10%. That is a big plus positive sign that he has announced yesterday. So, maybe they are willing to pay the tax. Ten percent tax is not much, if they make profit. If you make profits, you pay tax, nothing wrong with that. So, in that case, they may not even worry about it. They may just come in through their home country and pay the 10% tax instead of 20% which it is currently so. That could be a very positive effect also. Q: So, at least with respect to up until May 31, you would think that there is a chance we are going to see decent amount of flows provided other risk appetite factors are in place. A: Not only till March 31, next year. It would all depend on what the committee comes out with. But I think for the moment, the mood should be positive. I think the FM has done a lot, he could have done more. But he has done more than I expected him to do so. I think it should be positive. Q: What exactly did you think of the ability to approach Authority on Advance Ruling (AAR)? What exactly is your opinion on it? Do you think that will ease out the concerns that FIIs have? A: Definitely. I think it is a very positive step. So, on GAAR, if I had a wishlist of 10 items, he has fulfilled five of them, one of them being the ability to approach the AAR. What he has not done is as I said not clarified whether the DTC proposals or the definitions are still wide. But the definitely ability to approach AAR is a very positive step. It is definitely very positive.