Understanding GAAR


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Understanding GAAR

  1. 1. Copyright © 2009 Understanding GAAR PSS SeriesLets say a company formulates a policy to help employees reach home on time for a better work/life balance. The circular which is released says,“Employees who stay beyond 20 kilometers from the office can leave 30 minutes early”. Every office has some slippery people. People who want toslip through every nook or crack made available to them, even if it is not meant for them. Some extra-smart employees, who had a second home at adistance which was beyond 20 kilometers from office, immediately changed their address in the office record so that they could go home 30 minutesearly every day. This was the magic of manipulation. A system which was created with the “right” intent was left twisted. Such acts are also witnessedin public buses where seats reserved for the elderly are usurped by those who can very well stand and travel. In these cases we have seen that a lawdesigned for a specific purpose gets subverted by elements that seek loopholes in the law and create unfair advantage for themselves.The GAAR proposal was designed for this context. Thus the intent of this law should not be decried. GAAR is a simple rule which allows the Indian taxauthorities to levy tax if the arrangement or transactions done are impermissible avoidance arrangements.The government has formulated some tax avoidance policies to stimulate business. But these policies are subject to certain conditions. Thegovernment does not want companies to disregard the intent of these policies and wrongly benefit from it. Companies should not be formed in aspecific manner just for the sake of tax avoidance. Similarly companies should not collude with subsidiaries with sole objective of avoiding taxes. Theintent of GAAR is to ensure that companies do business both in letter as well as spirit of the law. However, the implementation of this law leaves a lot tobe desired and can be misused by the law-enforcing agencies themselves. The provisions made under GAAR still do not have much clarity. And thismay impact many companies.This has led to creating negative sentiments in the environment. Foreign institutional investors, who were the net buyers in the initial months of 2012,are now being the sellers as there is still high uncertainty about their investments. There is also news in the market that the investments made throughthe Mauritius route might also come under the eyes of the GAAR.So, although the intent of the proposed law may be justified, the lack of clarity has hampered investor sentiments. The feeling that the government mayexploit the situation for filling up its own coffers at the cost of companies is threatening the sentiments of investors and driving them out of the market.Sentiments are down, and the fear that law enforcers can misinterpret the law and penalize companies may have proven to be detrimental for theeconomy by weakening investor sentiments.The government seems to have taken cognizance of the situation and seems to be acting to alleviate misgivings of investors.The objective of this piece is not to take a political position on GAAR. The idea was to bring conceptual clarity about this widely covered subject inmedia. There may be many aspects of GAAR that has been deliberately left out so that the focus remains of conceptual understanding only whileleaving out the fine print. For feedback / questions, email professor@tataamc.comDisclaimer: The views expressed in this lesson are for information purposes only and do not construe to be any investment, legal or taxation advice.The contents are topical in nature and held true at the time of creation of the lesson. This is not indicative of future market trends, nor is Tata AssetManagement Ltd. attempting to predict the same. Reprinting any part of this presentation will be at your own risk. Tata Asset Management Ltd. will notbe liable for the consequences of such action. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.