GAAR — are safeguards adequate?

Now, the discussion on the issue as to whether or not India should have GAAR has become irrelevant after its introduction in the Finance Bill. At this moment arguably, pertinent discussion could be about whether or not GAAR has enough safeguards that address the concerns of the taxpayers. Common concerns of the most taxpayers are that GAAR gives too much power to the tax authorities; it will also hit genuine tax planning schemes and it creates uncertainty as it cannot be predicted as to which arrangements will be hit by GAAR.

Many countries such as Australia, Canada, China, New Zealand, South Africa, and Spain among others have safeguards in varying degrees in their GAAR responding to the similar concerns expressed in their jurisdictions. This article discusses the safeguards in the Indian provisions and particularly, the safeguard provided by Australia, Canada, and UK on Panel akin to the Approving Panel in Indian GAAR.

• Safeguards in the Indian GAAR GAAR has now the following safeguards after the amendments to the Finance Bill, 2012:  The burden of application of GAAR rests with the tax authority.
• Assessing Officer (AO) can invoke GAAR only after obtaining the approval of the Approving Panel.
• The Approving Panel will have an ‘Independent Member’.
• AO can pass Order only after the approval of the Commissioner.
• Taxpayer can avail the facility of the Advance Ruling on GAAR.

The Government has also formed a committee for drafting and recommending the Rules and the Guidelines for the implementation of GAAR. The Guidelines are almost certain to specify a monetary threshold for invoking GAAR and may incorporate the Parliamentary Committee’s recommendation that the AO should record the reasons before applying GAAR.

Burden of proof is on the Department

The earlier version of GAAR had one of the most criticised provision under which the taxpayer was responsible for proving that the GAAR is not applicable to it. In the amended Bill, this particular provision is deleted to bring it in line with other tax charging provisions. Now, the burden of proving the applicability of the GAAR in a particular case rests with the tax authority.

Approving Panel

GAAR has provided one more safeguard in the form of the Approving Panel. The provision on the Approving Panel in the clause 144BA of the Finance Bill is as under:

• The AO has to make a reference to the Commissioner for invoking GAAR.
• The Commissioner shall provide an opportunity of being heard to the taxpayer on receipt of the reference. He shall refer the matter to the Approving Panel if he is not satisfied by the reply of the taxpayer and is of the opinion that GAAR provisions are required to be invoked. The Commissioner shall also decide as to whether the arrangement is an impermissible avoidance arrangement or not when the taxpayer does not object or reply.
• The Approving Panel after providing an opportunity to be heard to the taxpayer has to dispose of the reference within six months after examining material and if necessary, after getting further inquiry conducted. The disposal could be either by declaring an arrangement to be impermissible or by declaring it to be not impermissible.

The AO will determine the consequences of such declaration of an arrangement as ‘impermissible avoidance arrangement’.

• Every direction of the Approving Panel shall be binding on the AO and the AO shall complete the proceedings in accordance with the directions only after the approval of the Commissioner.
• The period taken by the proceedings before the Commissioner and the Approving Panel shall be excluded from the time limitation for the completion of assessment. l The Approving Panel shall comprise of minimum three members. Out of which, two members would be of the Income-tax Department of the rank of Commissioner or above and third ‘independent’ member would be from the Indian Legal Service not below the rank of Joint Secretary.
• The Board may make rules for the procedure, for efficient working of the Panel and for expeditious disposal of references.

This proposed Section is largely based on the provision under UK’s draft law on GAAR2. For appreciating the issues involved in Approving Panel, it might be worthwhile to peruse the information on similar panels formed by Australia and Canada as well as proposed Panel of UK for the application of GAAR.

Role of the Approving Panel

Australia3 (GAAR Panel) and Canada4 (GAAR Committee) have non-statutory, advisory or consultative body to assist tax officers in administration of GAAR and to ensure consistency in approach in application of GAAR. In both the countries, although the Tax Officer finally decides as to whether or not to apply GAAR, he considers the advice given by the Panel before taking the decision. Similarly, UK’s proposed statutory Advisory Panel also shall give only its opinion as to whether there is reasonable ground for the application of GAAR5. The Indian Approving Panel neither is an advisory in nature, nor is mandated to assist the AO on the application of GAAR. Neither the clause 144BA elaborate, nor the ‘explanatory notes to the Finance Bill’ explain the role of the Approving Panel. This ambiguity can create different expectations among taxpayers as it has happened in the case of the ‘Dispute Resolution Panel’ (DRP).

Many taxpayers see the DRP as an adjudicating body on a dispute between the taxpayer and the Department. This expectation is because of the words ‘dispute resolution’ used for the Panel along with the lack of clarity on its role. On the other hand, many Departmental officers perceive DRP as an administrative safety mechanism to prevent inappropriate application of law against a taxpayer. Their justification is based on the argument that, the Law does not intend to have an appellate level between the AO and the Tribunal even before the order is passed. Moreover, DRP cannot be an adjudicating body, as it does not have necessary powers to function as an Appellate Court.

The role of the Approving Panel appears to be of an administrative in nature for ‘approving’ or ‘disapproving’ applicability of GAAR, a function similar to that of the Range head (Additional Commissioner) who approves some of the AO’s orders6. However, in absence of clarity, officers on the Panel may consider that it is their job to ensure successful invoking of GAAR in deserving cases. Therefore, they also may give directions to strengthen the case of the Department. On the other hand, the taxpayer would like to have a neutral body in which the panel should decide against the Department in weak cases rather than the Panel issuing directions to strengthen the Department’s case. Therefore, elaboration of the Panel’s role will help all in its functioning.

Composition of the Panel
The Parliamentary Standing Committee has recommended that the Departmental body should not review application of GAAR but an independent body should review it. The Committee has suggested that the Chief Commissioner should head the reviewing body and it should have two independent technical members. However, the Government has decided to form a Panel consisting of the senior Tax Officers and an Officer of Indian Legal Service as against the arguments for having non-Governmental independent members. Now the composition of the Panel appears to be more balanced than what was previously proposed, although taxpayers would have preferred to have non-Governmental independent member on the Approving Panel.

The Australian GAAR Panel consists of senior tax officers, businessmen and professional experts. The Panel is headed by a senior Tax Officer7. UK’s Advisory Panel is proposed to be to be chaired by an independent person and will have a tax officer and an independent member having experience in area relevant to the activity involved in the arrangement8. Whereas, the Canadian GAAR Committee consists of the representatives from the different departments of the Government such as Department of Legislative Policy, Tax Avoidance and Income-tax Rulings. The Committee also has lawyers and representatives from the Department of Finance of the Government.9

Presence of the non-governmental independent members on the Approving Panel gives more confidence to taxpayers in its decisions. Tax-payers perceive such a panel to be fair and unbiased. It also results in external review of the Departments’ work on GAAR and makes the Department some-what accountable to external systems.

However, having independent non-governmental member in the Committee raises different issues, such as such member’s eligibility criteria, transparency in selection process, tenure, etc. Having non-Governmental independent members on the Panel also raises the issue of protection of taxpayers’ confidentiality. Not many taxpayers would prefer their affairs becoming known to other professionals or businesspersons. Again, non-Governmental independent members have conflict of perception and occasionally may have conflict interest. Unlike in many developed taxation systems, it is doubtful as to how many independent members in India would take an adverse view of the arrangement devised by a fellow professional or a businessperson. Further, a non-Governmental independent member on a Panel also may lead to the issue of his accountability, especially when the Panel’s decision is not advisory but is binding on the tax authority under the present law. Moreover, eminent independent persons may not be easily available for the Approving Panel work due to pressure on their time. Constituting a Panel with eminent independent persons is easier said than done and therefore, a Panel consisting of independent members also may not solve the problem.

Powers and procedure of the Panel

Both, the Australian GAAR Panel and the Canadian GAAR Committee do not investigate or find facts or arbitrate disputed contentions. They advise on the basis of the facts referred by the tax officer and by the taxpayer. The Panel may suggest tax officer to make additional enquiries if the facts are disputed. As against this, Indian Panel is armed with more powers and it can direct the Commissioner to get necessary enquiries conducted as the Panel’s role is not advisory in its nature.

The Australian GAAR Panel may extend invitation to the taxpayer to make oral as well as concise written submission before it. The Canadian GAAR Committee does not afford taxpayer right to represent before it, but they may file written submissions before it. The taxpayers are not entitled to have copies of the reports and other submissions made by the authorities or experts in their case before the Committee. However, they will receive the copy of the Committee’s decision along with the reasons of the decision. The Australian Tax office releases the decision of the Panel in the form of either taxation ruling or in the form of the summarised decision on issue to be followed by the tax officers as the official tax office position on that issue.

Working of the Panel

The statistics of Australia and Canada show that these bodies have recommended application of GAAR in majority of the cases referred to it. In a period from 1st July 2007 to 30th June 2011, the Australian Panel advised application of GAAR in 64% of cases, called for further information in 17% of cases, whereas it decided not to apply GAAR only in 19% of the cases referred to it10. Whereas, as on 31st March 2011, the Canadian Committee approved application of GAAR in 73% cases referred from the date since GAAR was first introduced in Canada in 1988¹¹. Based on this statistics, one can expect similar trend in India on approval of GAAR references.

The statistics of the decisions of these Panels are available in public domain in Australia and in Canada. Australia also releases the decisions of the Panel in form of taxation rulings or in form of decisions to be followed as a precedent. UK’s draft law also proposes publication of a synopsis of each opinion (without revealing the identity of
taxpayer to protect confidentiality) and publication of regular digests of such opinions.¹² It might be good to release statistics of the decisions of the Approving Panel for transparency.¹³

Purposive interpretation of GAAR

One relevant issue, which is not a safeguard but requires consideration for ensuring effectiveness of GAAR is of having a legal provision on interpretation of GAAR.

The Indian Courts have largely applied the rule of literal construction to the interpretation of taxing statutes. This approach is based on the following two principles:

•     Legislation should be strictly interpreted on the basis of the words used and legislative purpose should not be presumed and

•     If the words of a provision are found to be ambiguous, the ambiguity should be resolved in favour of the taxpayer.

This approach creates problem when taxpayer pay lesser taxes by using a legal construction or transaction based on a gap or a loophole in law which will place him outside reach of the law.14 Therefore, the Courts of Australia, UK and Canada more often use purposive interpretation on provisions of tax avoidance as narrow interpretation of the legal provisions could result in injustice. Purposive interpretation of taxing statute seeks to interpret the provision according to the object, spirit, and purpose of the tax provision. This approach is sum marised in the case of the Pepper v. Hart, (1993) 1 All ER 42, HL(E) as under:

“The object of the Court in interpreting legislation is to give effect so far as the language permits to the intention of the Legislature….. Courts now adopt a purposive approach which seeks to give effect to the true purpose of legislation and are prepared to look at much extraneous material that bears upon the background against which the legislation was enacted.”

Purposive interpretation is also justified on the ground of fundamental principle of taxation statute, which seeks to treat similarly placed taxpayers similarly. In absence of purposive interpretation, arrangement of one taxpayer may be treated as tax avoidance, but similar arrangement of other taxpayer may not be treated as tax avoidance due to some minor insignificant difference. Therefore, Australia15 and New Zealand16 have enacted a specific legal provision to ensure that the provision is interpreted according to purpose and object of the statute. Other provision permits them to use extrinsic aids to overcome the problem of gathering the purpose and object of the law17.

Tax laws deal with the transactions taking place in changing economic circumstances. Tax avoidance schemes are carefully devised so that legal provision may not catch them. Purposive interpretation could be helpful on such occasions. Therefore, clarification in the proposed Guidelines may help in ensuring uniformity in the judicial approach on interpretation of the GAAR.

Conclusion

The Indian Approving Panel is statutory and non-advisory body and its directions are binding on the AO. It is sufficiently empowered to carry out its function effectively by getting further enquires conducted. The Indian Panel is the most powerful when compared to similar Panels in other jurisdictions. Therefore, legally, the Indian GAAR has the strongest safeguard on this ground among all.

However, industry’s apprehensions on GAAR may be arising out on implementation of such tax laws in India. It is a fact that many of these concerns are because of the huge trust deficit between the Department and taxpayers. Improving their relationships is an uphill task in a country which has massive tax evasion leading to various estimates of the size of parallel economy. For the Government, raising more revenue by plugging revenue loss taking place due to tax evasion schemes is a matter of high priority when less than 3% of its population bears the burden of paying taxes. Therefore, there is no going back from GAAR. Now, one can only hope that, GAAR and its procedure will gradually evolve for better with the feedback of the stakeholders.

17    Australia section 15AB of Acts Interpretation Act, 1991 and New Zealand section 5(1) and 5(2) of the Interpretation Act, 1999.