The issuance of draft guidelines for the implementation of the General Anti Avoidance Rules (GAAR) for public comments (Draft Guidelines) has brought the much-discussed GAAR back into the spotlight. The GAAR was, initially proposed in the Direct Taxes Bill, 2010 (DTC) to codify the principle of “substance over form” and give the Indian tax authorities sweeping powers to invalidate or otherwise ignore an arrangement as an “impermissible avoidance arrangement” in the event that such arrangement was entered into with the main objective of obtaining a tax benefit. While the DTC is yet to become operational, the applicability of the GAAR was, against strong industry sentiment, advanced by the Ministry of Finance by inserting certain operative provisions in the Finance Act, 2012. The draft guidelines, which is yet to be approved, invites comments from industry stakeholders on the regulatory framework that would govern the implementation of the GAAR. The Prime Minister’s Office, as well as the Finance Ministry, has clarified that the draft guidelines is in preliminary form and will need to be approved, after taking into consideration industry feedback, by the Prime Minister (who has recently taken charge of the finance portfolio).
The draft guidelines offers some solace to assessees in as much as it proposes, amongst other things, (i) that the GAAR will not be invoked retrospectively and instead will only be applied to income accruing or arising on or after April 1, 2013; (ii) the need for a monetary threshold below which the GAAR would not be invoked (one hopes that the threshold when prescribed will be a meaningful one); and (iii) that where only a part of an arrangement is held impermissible, the tax consequences of an ‘impermissible avoidance arrangement’ will be limited to only that part of the arrangement and not the entire arrangement. That said, unless the final guidelines places additional and more stringent fetters on its invocation, given the extensive discretion granted to the tax authorities under the GAAR, the excessive tax and compliance burden will be worrisome.
The GAAR had triggered concerns among PE funds in relation to the usage of Mauritius as a holding company destination for investments into India. Consequently, this might increase the attractiveness of Singapore as a holding company destination as the comprehensive economic cooperation agreement entered into between India and Singapore provides certain inherent ‘substance requirements’ to qualify for its benefits and, hence, it could be argued that Singapore-based entities that meet these ‘substance requirements’ are not ‘impermissible tax-avoidance arrangements’. On the other hand, this may well come to naught as the tax authorities could argue that these ‘substance requirements’ are mere thresholds to determine eligibility under the agreement and are not sufficient, on their own, to demonstrate commercial substance when tested against the GAAR.
With the GAAR set to take effect, as of now, on April 1, 2013, reportedly, several FIIs and PE funds have already begun the process of strengthening the commercial rationale for locating their investment entities in Mauritius and Singapore, including by increasing senior-level headcount and acquiring independent office infrastructure in these jurisdictions. Expect this trend of re-examination to continue and accelerate as the international investing community utilises this window of opportunity to bolster their investment structures to provide more robust arguments against potential challenges under the GAAR.
At the end of the day, the choice of jurisdiction is going to have to be driven by business considerations that will best allow the fund to demonstrate clear and substantial commercial rationale for that choice.
(Roshan Thomas is a partner at Lexygen, a Bangalore-based law firm)