The issue of the General Anti Avoidance Rule (GAAR) has dominated the news recently and there are fears that GAAR will discourage foreign investment in India. However, tax avoidance can hinder public finance objectives and it is in this context GAAR was introduced in this year’s Budget. Last week, the Finance Minister pushed back the implementation of GAAR by a year. What is GAAR? GAAR was first introduced in the Direct Taxes Code Bill 2010. The original proposal gave the Commissioner of Income Tax the authority to declare any arrangement or transaction by a taxpayer as ‘impermissible’ if he believed the main purpose of the arrangement was to obtain a tax benefit. The 2012-13 Finance Bill (Bill), that was passed by Parliament yesterday, defines ‘impermissible avoidance arrangements’ as an arrangement that satisfies one of four tests. Under these tests, an agreement would be an ‘impermissible avoidance arrangement’ if it (i) creates rights and obligations not normally created between parties dealing at arm’s length, (ii) results in misuse or abuse of provisions of tax laws, (iii) is carried out in a way not normally employed for bona fide purpose or (iv) lacks commercial substance. As per the Bill, arrangements which lack commercial substance could involve round trip financing, an accommodating party and elements that have the effect of offsetting or cancelling each other. A transaction that disguises the value, location, source, ownership or control of funds would also be deemed to lack commercial substance. The Bill as introduced also presumed that obtaining a tax benefit was the main purpose of an arrangement unless the taxpayer could prove otherwise. Why? GAAR was introduced to address tax avoidance and ensure that those in different tax brackets are taxed the correct amount. In many instances of tax avoidance, arrangements may take place with the sole intention of gaining a tax advantage while complying with the law. This is when the doctrine of ‘substance over form’ may apply. ‘Substance over form’ is where real intention of parties and the purpose of an arrangement is taken into account rather than just the nomenclature of the arrangement. Many countries, like Canada and South Africa, have codified the doctrine of ‘substance over form’ through a GAAR – type ruling. Issues with GAAR A common criticism of GAAR is that it provides discretion and authority to the tax administration which can be misused. The Standing Committee responded to GAAR in their report on the Direct Taxes Code Bill in March, 2012. They suggested that the provisions should ensure that taxpayers entering genuinely valid arrangements are not harassed. They recommended that the onus should be on tax authorities, not the taxpayer, to prove tax avoidance. In addition, the committee suggested an independent body to act as the approving panel to ensure impartiality. They also recommended that the assessing officer be designated in the code to reduce harassment and unwarranted litigation. GAAR Amendments On May 8, 2012 the Finance Minister amended the GAAR provisions following the Standing Committee’s recommendations. The main change was to delay the implementation of GAAR by a year to “provide more time to both taxpayers and the tax administration to address all related issues”. GAAR will now apply on income earned in 2013-14 and thereafter. In addition, the Finance Minister removed the burden upon the taxpayer to prove that the main purpose of an alleged impermissible arrangement was not to obtain tax benefit. These amendments were approved with the passing of the Bill. In his speech, the Finance Minister stated that a Committee had also been formed under the Chairmanship of the Director General of Income Tax. The Committee will suggest rules, guidelines and safeguards for implementation of GAAR. The Committee is expected to submit its recommendations by May 31, 2012 after holding discussions with various stakeholders in the debate.
This article was published in the Indian Express on April 8, 2011
Dodging the Drafts
By Kaushiki Sanyal and C.V. Madhukar
Social activist, Anna Hazare’s fast unto death for the enactment of a strong Lok Pal Bill has provided an impetus to examine not only the Bill proposed by civil society activists but suggestions made by various experts.
The idea of establishing an authority where the citizen can seek redress against administrative acts of the government was first mooted in 1963 during a debate on Demands for Grants for the Law Ministry. Under the existing system, a citizen can either move court or seek other remedies such as petitioning his Member of Parliament. However, these remedies are limited because they maybe too cumbersome or specific grievances may not be addressed. Also, the laws that penalise corrupt officials do not have provision to redress specific grievances of citizens. Currently, corrupt public officials can be penalised under the Indian Penal Code, 1860 and the Prevention of Corruption Act, 1988. Both these laws require the investigating agency to get prior sanction of the central or state government before it can initiate the prosecution process in a court.
The office of the Lok Pal or an Ombudsman seeks to provide a forum for citizens to complain against public officials. The Lok Pal would inquire into such complaints and provide some redressal to citizens. The basic idea of the institution of Lok Pal was borrowed from the concept of Ombudsman in countries such as Finland, Norway, Denmark, Sweden, U.K. and New Zealand. Presently, about 140 countries have the office of the Ombudsman. In Sweden, Denmark and Finland, the office of the Ombudsman can redress citizens’ grievances by either directly receiving complaints from the public or suo moto. However, in the UK, the office of the Parliamentary Commissioner can receive complaints only through Members of Parliament (to whom the citizen can complain). Sweden and Finland also have the power to prosecute erring public servants.
The first Lok Pal Bill in India was introduced in 1968, which lapsed with the dissolution of the Lok Sabha. The Bill was introduced seven more times in Parliament, the last time in 2001. Each time it lapsed except in 1985 when it was withdrawn.
Several commissions have examined the need for a Lok Pal and suggested ways to make it effective, without violating Constitutional principles. They include: the First Administrative Reforms Commission (ARC) of 1966, the National Commission to Review the Working of the Constitution of 2002 and the Second Administrative Reforms Commission of 2007. The Lok Pal Bills that were introduced were referred to various Parliamentary committees (the last three Bills were referred to the Standing Committee on Home Affairs).
The First ARC report recommended that two independent authorities be created to redress grievances: first, a Lok Pal, to deal with complaints against the administrative acts of Ministers or secretaries of government at the centre and the state; and second, a Lokayukta in each state and at the centre, to deal with complaints against the administrative acts of other officials. Both these authorities should be independent of the executive, judiciary and legislature and shall be appointed by the President on advice of the Prime Minister, Leader of the Opposition and the Chief Justice of India.
The National Commission to Review the Working of the Constitution urged that the Constitution should provide for the appointment of the Lok Pal and Lokayuktas in the states but suggested that the Prime Minister should be kept out of the purview of the authority.
The Second Administrative Commission, formed in 2005, also recommended that the office of the Lok Pal be established without delay. It was in favour of including Ministers, Chief Ministers and Members of Parliament. However, it wanted to keep the Prime Minister outside the Lok Pal’s ambit. The ARC also recommended that a reasonable time-limit for investigation of different types of cases should be fixed.
The 1996, 1998 and 2001 Bill covered Prime Minister and MPs. The Standing Committee examining the 1998 Bill recommended that the government examine two basic issues before going forward with the Bill: first, MPs are deemed to be public servants under the Prevention of Corruption Act, 1988. If they are also brought under the purview of Lok Pal it may be “tantamount to double jeopardy”; and second, subjecting MPs to an outside disciplinary authority may affect supremacy of Parliament.
The 2001 Bill was also referred to the Standing Committee, which accepted that the Prime Minister and MPs should be included in the Bill. It further recommended that a separate legislation be enacted to ensure accountability of the judiciary. It however stated that the Bill did not address public grievances but focussed on corruption in high places.
The states have been more successful in establishing the Lokayuktas. So far 18 states have enacted legislation to set up the office of Lokayukta. While Karnataka Lokayukta is often hailed as a successful case, several other states have had limited success in combating corruption since all of them are recommendatory bodies with limited powers to enforce their findings.
A Group of Ministers is looking into ways to tackle corruption, including the establishment of a Lok Pal. A public debate on the issues raised by various committees would help iron out the weaknesses of any proposed legislation.
This article was published in the Indian Express on April 8, 2011
