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Tasty GAARnish on an unpalatable dish

The Shome panel distill the best ideas about GAAR from around the world and adds a dose of pragmatic Indian concerns. Will these be implemented?

The ecstatic welcome that the Shome committee’s recommendations on GAAR has been given in business and investing circles is entirely understandable. The reasons are not difficult to see. The headline recommendation of the committee, that GAAR should be postponed for three years, is in a sense the least important of all. Many of the other recommendations are probably more important in the long run. For example, the abolition of capital tax on listed securities and the grandfathering of existing transactions.

However, even these measures by themselves are not the most important takeaway from the committee’s recommendations. What is most important is that there is an underlying, coherent framework for the applicability of GAAR. There is recognition that taxation is not a form of warfare between the government and businesses. Most importantly, there is an implicit understanding that by its very nature, GAAR-based tax demands have to be a discretionary decision at the end of the day and the practical nature of our tax administration is such that discretionary actions need to eliminated. The recommendations go to great length to do this. There is an entire methodology of objectively deciding where GAAR can’t be applied, the concept of a ‘negative list’ of actions that will be exempt from GAAR. Crucially, no action under GAAR can be taken without the go-ahead of an approving panel in which taxmen are actually in a minority.

The Shome committee recommendations have come as a breath of fresh air. They demonstrate that even at this late stage, a significant course correction is possible that can revive investment activity in the country. Of course, these are just recommendations of a committee. It still remains to be seen whether or to what extent they will be acceptable to different parts of the government and to what degree (and in what time-frame) they will be acted upon. We’ve all become used to frequent occurrences of the proverbial slip between the cup and lip. Let’s see how this one works out.