India has been greatly involved in signing of the Double Taxations Avoidance Agreements with various tax-haven countries. This has boosted the image of India as a ‘lookout destination’ for investment and an emerging hub for economical activities.
Long long ago in 2007 Vodafone International Holdings BV decided to expand its footprint in the Indian mobile phone market by buying out Hutchison Essar. But it decided to take the roundabout route via tax haven Cayman Island based subsidiary.
Vodafone International Holdings BV, based in Netherlands and controlled by Vodafone UK, obtained the controlling interest and share of CGP Investments Holdings Ltd located in Cayman Island for a value of $11.01 billion from Hutchinson Telecommunications International Ltd, which had stake in Hutchinson Essar Ltd that handled the company’s mobile operations in India. HEL had its stake in CGP Holdings, from which Vodafone bought 52 per cent of HEL’s stake in 2007, thereby vesting controlling interest over them.
This started a ‘wherever you go, we will follow’ saga of the IT department chasing the company. The Bombay High Court ruled that where the underlying assets of the transaction between two or more offshore entities lies in India, it is subject to capital gains tax under relevant income tax laws in India. An aggrieved Vodafone appealed before the Supreme Court to revisit the judgment, which makes them liable for a record amount of Rs 12,000 crores going to the tax authorities’ kitty.
The Supreme Court ruled in 2012 that Vodafone’s actions were “within the four corners of law” . Apex Court during the Vodafone issue discussed 3 landmark cases to ascertain the situation:
• In English case IRC v Duke of Westminster, it was held that it is the taxpayer’s legal right to attract least amount of tax and it will construe a situation of tax avoidance. Thus, declaring that tax avoidance is different from tax evasion.
• In McDowell & Co. V. CTO, the Honourable court held that tax avoidance is bad. The case blurred between the provisions of tax avoidance and tax evasion.
• In Union of India v. Azadi Bachao Andodal , the honorable court while disagreeing the judgment of McDowell case held that tax avoidance is valid and legally right provided that the scheme is within the parameters of law.
Supreme Court overruling the judgment of Bombay High Court held that principles lead down in Azadi Bachao Andolan were correct and court while judging such situation should give priority to legal form of the transaction and that in application of judicial anti-avoidance rule, the revenue may invoke the “substance over form” principle or “piercing the corporate veil” principle only after it is able to establish on the basis of the facts and surrounding the transaction that the impugned transaction is a sham or tax avoidant.
It also advised Indian taxmen to “look at” the transaction instead of “looking through” it to attribute motives to the deal. What the Indian government saw however was over ₹20,000 crore in unpaid taxes, interest and penalty slipping out of its hands.
It decided to strike fear into the heart of companies by coming up with the General Anti-Avoidance Rule (GAAR). This rule basically said that the government could dig up past deals, all the way back to 1962. Introduction of GAAR was announced in the Finance Act 2012. And the first draft of GAAR when published received heavy criticism and thereby Shome committee was formed to come up with recommendations and guidelines. The instant paper discusses ramification of GAAR into two parts. First part discusses the ramifications of first draft of GAAR in a general manner without going into detail and second part discusses the ramifications of recommendations given by the Shome committee.
Many provisions of GAAR have been criticised by various people. However, the basic criticism of GAAR provisions is that it is considered to be too sweeping in nature and there was a fear that Assessing Officers will apply these provisions to misuse and harass the general honest tax payer too.
There is only a fine distinction between Tax Avoidance and Tax Mitigation, as any arrangement to obtain a tax benefit can be considered as an impermissible avoidance arrangement by the assessing officer. Thus, there was a hue and cry to put checks and balances in place to avoid arbitrary application of the provisions by the assessing authorities.
The government has deferred GAAR up to April 1, 2017.
