Uncertainty surrounds India’s GAAR implementation

The Indian government decided to defer implementing GAAR for another year after a visit from the US Treasury Secretary in April.

General Anti-Avoidance Rules were established to fight tax avoidance by enforcing the country’s tax regulations. The GAAR regulations were part of the proposed Direct Tax Code 2010 to deter sophisticated means of ducking income taxation through legal means. As a result, the regulations were specifically designed to impact multinational corporations that shift assets to tax-free locales and force them to pay tax on these assets. GAAR was originally intended to be instituted in April 2011, but was deferred to April 2012 amidst a number of reservations. The government hopes to bring them into effect during the 2013/14 fiscal year.

One of the biggest issues facing the implementation of GAAR is the wording of the proposed regulation itself. Several elements are extremely vague, which has caused confusion among both analysts and corporate traders who are unsure how the regulations could be used. An analyst for PwC India voiced worries about one of the specific phrases “where one of the main purposes is to obtain a tax benefit”, because the regulations may allow authorities to enforce these standards upon any agency they see fit. The analyst noted that, “given that ‘tax benefit’ is worded unreasonably widely, one hopes that this issue will also be addressed.”

Uncertainty about how GAAR regulations would be implemented has led to a decrease in value on the Bombay Stock Exchange. In early May, the market fell over two percent over concerns about how GAAR would affect business. Many of the selling has come from foreign investors who are unsure about continuing to invest in India’s markets for the long term until the effects of GAAR are clearly seen. Some experts predict that selling will only increase as concerns go unanswered.

Interestingly, the rupee increased in value substantially on the news that GAAR was being deferred. Many feel that the increase will not lead to any considerable gains, since many questions about the regulations have yet to be clarified. Analysts are worried about other parts of the legislation, such as the provision that tax authorities will have to shoulder the burden of collecting evidence of tax avoidance.

Speaking on the continued GAAR deferment, Singapore economist Radhika Rao said, “These comments should provide short-term relief to the domestic markets, however, the decision to put the onus on tax authorities to prove liabilities could infuse some extent of ambiguity and subjectivity into the proposals.” As long as analysts are unsure what to expect, it is likely that India’s market gains will be minimal, even though GAAR will not be implemented until next year.