The Union Budget raises a very fundamental question. When is a good idea abandoned? Firstly, a good idea is abandoned when it is found to be not feasible. Secondly, a good idea is abandoned when it has served its purpose without even implementing it. In a way, this budget sends a very subtle message about the General Anti Avoidance Rules (GAAR). It may have achieved its purpose even without implementing it. But first, what does this budget say about GAAR?
Budget and GAAR:
The Union budget made two significant announcements about GAAR. Firstly, GAAR which was to be implemented effective April 1st 2015 stands postponed by 2 years and will now be implemented effective April 1st 2017. Secondly, the government has officially confirmed that GAAR will not be retrospective and will only be prospective from the date of effective implementation. But why are these 2 announcements so important?
One of the justifications provided by the Finance Minister for postponing the implementation of GAAR was the dependence on foreign portfolio inflows. Frankly, that is not going to change in the next 2 years, as India will continue to be dependent on portfolio inflows to bridge its fiscal deficit. And blurring the lines between FDI and FPI will only lead to a natural rise in the stake of foreign portfolio investors. So what is going to change in the next 2 years?
Frankly, nothing! The first idea behind GAAR was to bring about more transparency in flows. That has already been achieved through the New FPI Regulations. The second idea behind GAAR was to ensure that tax saving is incidental and not core to foreign investments. With the Volcker rule and the Dodd Frank Act, this has already been substantially achieved. The third idea was round tripping of funds. That will anyways be tracked by the government’s sharp focus on curbing black money. In a nutshell, there is not a big role left for GAAR to achieve. But can it be abandoned?
Look, what happened to the DTC:
The current Union Budget wrote an obituary to the Direct Tax Code (DTC). It is quite understandable, as most of the provisions of the DTC had been implemented in spirit, if not in letter. Not surprisingly, the DTC as a concept was abandoned in this budget. The idea of GAAR may meet a similar fate. In the next two years, it may truly outlive its utility. And the GAAR may anyways have been implemented; in spirit, if not in letter.