The government has been pragmatic in deferring a new tax regime that is stricter on avoidance. The General Anti-avoidance Rules introduced in the last budget had led to widespread concerns that the bar for establishing tax avoidance was set too low and the tax administration was not sufficiently geared to judiciously exercise the deterrence inherent in them. Companies avoid paying tax through a host of avenues, ranging from exploiting incentives like those provided for special economic zones to more complicated methods like treaty shopping. The intention of the law is to deter aggressive tax avoidance, and the trick is to draw the line between what is officially condoned and what isn't. A review committee set up by the prime minister's office to look into the new anti-avoidance tax rules has raised the threshold substantially for the taxman to begin sniffing around business activity. This is in line with the government's thinking that high compliance costs hinder tax revenue and should be avoided.
Thus, the critical departure now is that the authorities must establish that tax benefit was the sole motive - not one among other motives - before a business deal can be investigated under anti-avoidance tax rules. Clear-cut distinctions between tax mitigation and tax avoidance have also been recommended alongside cut-offs for deal size and date. Procedures for invoking and investigating tax-avoidance cases have also been tightened to lessen the scope of administrative discretion. The tax department can use the extra time till the rules kick in to train staff in this new form of deterrence that other countries have only recently incorporated into their laws. All of these should help bridge the trust deficit between the taxpayer and the taxman.
Among the original intentions of the anti-avoidance tax rules as introduced in the budget was an attempt to stop the "round-tripping" of rupees that move out of the country through hawala channels and return as dollars via offshore tax havens like Mauritius. But rules requiring companies based in Mauritius to prove that they were bona fide commercial establishments and not mere letter-box firms were meaningless because these simply cannot be enforced. The Indian taxman has no jurisdiction in the island nation and so the review committee has prudently decided to restrict its application in this context. And in a recommendation that has implications in cases like Vodafone's acquisition of Hutc-hison's stake in its Indian telecom operations, it says where treaties with other countries have built-in anti-avoidance provisions, these need not be substituted by our own rules. The geographical spread of over-arching Indian tax rules is thereby limited, an issue that has been a source of consternation for foreign investors.