Don’t Just Postpone GAAR; Flush It Down The Toilet: Chetan Bhagat

Chetan Bhagat

Don’t Just Postpone GAAR; Flush It Down The Toilet: Chetan Bhagat

Editorial Staff

Noted novelist Chetan Bhagat has launched a scathing and no-holds barred attack on the Government’s policies which he claims have driven away foreign investors and ruined the economy. GAAR is the root cause of all evil, he says, and implores the Prime Minister to “flush it down the toilet” so as to create a business friendly tax regime and restore investor confidence

Chetan Bhagat, in his article in the Times of India, draws on his rich experience as a merchant banker to explain that foreign investors are drawn to invest in a country for two reasons: first, its growth prospects and second, the stability of its economic and fiscal policy. The problem with India, he says, is that its fiscal policies are highly unstable. No one can say with any certainty whether a certain fiscal policy introduced today will be continued tomorrow or not. In this, Bhagat is echoing the timeless wisdom of Nani Palkhiwala who, as early as in 1993, sounded the warning that the Mandarins of North Block were making a big blunder by mistaking change for progress and mindlessly churning out ill-thought out amendments to the Income-tax Act year after year. Even in contemporary times, eminent senior advocate Harish Salve explained that the reason why China was miles ahead of India in terms of foreign investment and progress was because, though it was a totalitarian regime, it was a model for stability in its fiscal policies. The law was not amended frequently to suit the whims and fancies of the people who are in power.

In contrast, the “arrogant government policies such as GAAR” have created an “uncertain and arbitrary environment” in India says Bhagat. This has resulted in three international rating agencies downgrading India’s status as an investment destination, he adds.

Bhagat calls GAAR a “disaster” and makes it plain that he has absolutely no confidence in the income-tax department being able to administer GAAR in a rational manner. Given the sweeping powers that have been given to the Assessing Officers to question any transaction ever done by a company and label it as tax avoidance, there is enormous scope for abuse of power, he says.

Bhagat does not mince words. He says that the perception of GAAR as being a “draconian rule” is so bad, that it cannot be sugar-coated or postponed, but has to be “thrown out”. “Nothing short of flushing GAAR down the toilet will work” he adds with emphasis.

Bhagat also faults the Government’s action in retrospectively amending the law to supercede the Supreme Court’s verdict in Vodafone vs. UOI. Bhagat explains that the cumulative effect of GAAR and the Vodafone law is that investors, both in India and abroad, “have a sneaky suspicion that the Indian government is out to get us”. He points that the sentiment is that “if a hapless investor puts the money in our country, works hard and waits patiently for years, the government will come running to pluck the fruit right when it ripens”. Such “Government tyranny” and “greed to collect some extra taxes” destroys investors’ confidence, he says, and makes them run away from India.

Draconian measures like GAAR and the Vodafone law which have spooked even the most-ardent India believers are short-sighted and akin to “killing the golden goose for dinner”, he adds with a flourish.

He also points that the Government “thrives on hubris” (extreme pride or arrogance, a loss of contact with reality and an overestimation of one’s own competence). It is used to passing unjust orders that common people in India are only too happy to accept. He subtly reminds the Government that while Indian investors have no choice but to live with the arbitrary policies of the Government, the foreign investors are not subject to any such limitation. They don’t want to take any chances. There are a number of countries wooing the foreign investors and they will be forced to abandon India en masse and migrate to foreign countries if they get disillusioned with India, he warns.

Bhagat, however, sees a ray of hope in the mildly proactive stand being adopted by the Prime Minister who also took over as Finance Minister. The Prime Minister, being an eminent economist himself, has seen the severe damage that short-sighted policies like GAAR and Vodafone can create. On Vodafone, the Prime Minister has directed the Income-tax department to “go slow” till he mulls over all its implications. On GAAR, the Prime Minister has sent a clear message that he is not happy with the present state of affairs by appointing a high-level committee to undertake stakeholder consultations (see also Dear Prime Minister, Scrap GAAR & Vodafone Law & Redeem Yourself)

Implied in Bhagat’s criticism are two suggestions for the Prime Minister to consider. First, set up a high-powered committee of economists, industrialists and bureaucrats (but not form the income-tax department) to objectively consider whether GAAR is at all appropriate and suitable for India at the present moment given (a) the level of immaturity of the income-tax department, (b) the dismal state of our dispute resolution system and (c) the adverse impact that GAAR will have on Indian and foreign investment. In fact, in the United Kingdom, an impartial panel was first set up to consider whether GAAR was at all suitable for that Country. Then, GAAR was enacted with a number of safeguards to ensure that there is no arbitrary application of the law by the income-tax department. We should adopt that model and tread carefully instead of rushing in blindfloded. Bhagat’s second suggestion is that a law should be enacted that will protect the sanctity of markets and interests of participants. He assures that both these measures will, if implemented, reassure investors that India has not only an open mind, but is also open for business and the billions of dollars in investment will again start to flow back into the Indian economy.

13 comments on “Don’t Just Postpone GAAR; Flush It Down The Toilet: Chetan Bhagat
  1. veermani says:

    However learned the author may be I think to use the term “flush it in the toilet” is not appropriate. The authors of GAARS are not naive. They understood the law as expounded by the Hon’ble Supreme Court and after full deliberation introduced the GAAR. If Vodafone paid tax either in India or in the country where the alleged transaction took place or anywhere else this situation would not have arisen. If the business people think along with their consultants in India that they can blackmail a sovereign government I would hold those who use such indecent language as arrogant. The government does not want to lay a trap for foreign investment neither the investment in India is made gratis or out of love for the country. The business people look for security and return on their investments. Like a tree does not stand to provide humans oxygen and shade, so the business community does not make investments to benefit the people, but to benefit themselves. Constructive criticism is welcome, but it should not cross the limits.

  2. ajit vadakayil says:

    i have penned a piece of advise for chetan bhagat.
    he must punch into google search PERCEPTION AND RELATIVITY- VADAKAYIL
    capt ajit vadakayil

  3. CA Subramani Veeraraghavan says:

    Well, I think it is improper to castigate GAAR per se and flush it down the toilet. If it is so flushed, we need to run it through a Sewage Treatment Plant and re-cycle it.
    All economies need to identify, define, generate and re-inforce their revenue streams. It is just natural that each country ties to ring fence and protect it’s revenue/ income source. If we recollect, Obama, president of the largest economy (by GDP), has spoken vehemently against various US companies skittling away profits to tax havens and avoiding paying taxes in US and he is inclined to move legislation to prevent this and dis-incentivise this practice.
    GAAR should be seen as an honest effort to subvert dishonest ways of ducking (read evading) taxes. If revenues are earned from India or India based assets, it is legitimate that India should receive the tax element in it. So, why shouldn’t India put in place measures to prevent circumventing payment of legit tax in India. And, it isn’t India alone that is harnessing such protectionist measures (like GAAR, TIE etc). UK and Australia, for instance, have proposed similar legislative measures.
    The issue is not about GAAR, if the same is well legislated with the necessary safe harbor protection measures, so as to prevent unscrupulous Tax officers harassing assessees. The contention is on giving it retrospective applicability that is detrimental and seen as imbuing it with the “uncertainty” character. As bonafide tax planning efforts have been made by various entities, it will be unfair to annul all that by a stroke of retrospective legislation.
    As regards foreign investment, it is not correct to say that we should attract foreign investment by compromising on our right to genuine tax revenue. That is not the reason to abandon genuine and bonafide measures to prevent any misuse of our laws.
    CA. Subramani Veeraraghavan

  4. Anoop says:

    It would be better if Chetan Bhagat keeps to his job of writing fictional spicy novels instead of spilling over his knowledge on serious issues like GAAR, of which he doesn’t seem to have even a basic understanding.

  5. Panda says:

    If some body earning any things from India, let them pay the tax logically. GAAR is not against the foreign investments, its against the so called tax planning through the tax havens.

  6. Naresh Balodia says:

    Will Mr Chetan Bhagat and all those who agree with him, pl explain why GAAR is there in most of the so called developed countries and has any of all those advised those countries in the same way?

  7. Jatin says:

    CB has felt that his success of one or two books is fading. Thats why first he filed suit agaist Amit Khan(for 3 idiots) now he is writing against against GAAR.

    He is using these tactics to keep himslef in the limelight.

    Does he have any evidence that no foreign exchange would come to India due to GAAR effect.


  8. NK says:

    Well … CB is turning himself into an idiot day by day. Perhaps a pseudo intellect full of gas like so many of the NGO guys. Can’t believe he is an IIT graduate.

    True, policy making should be clean and there may not be flip flops. True, these laws can’t be retrospective and Vodafone like situation should have grandfathering clause.

    But it is also true that as much as we may need foreign money, these funds also need returns. But that gain should have a tax component somewhere. If the funds use/exploit Indian assets to make those returns, they should pay respective taxes in India. I do not see a problem in that.

  9. Joy says:

    In China, GAAR was introduced in 2008 and the measures include not only thin capitalisation, CFC and Transfer Pricing, but also anti-abuse rules. There have been controversial circulars like Circular No. 698 in China also. Since then, Chinese GAAR has evolved into a very effective, some would say, draconian regime. So, what does Mr. Chetan Bhagat have to say about China and so many other countries, which have GAAR in place ? Why should India not enforce legitimate measures against entities, who prefer to bend the rules and do not pay rightful taxes ? Indeed, GAAR should come, but of course, after discussion and inputs from the concerned stakeholders.

  10. D Baxi says:

    The GAAR and the retrospective clarification to tax indirect transfer of Indian assets as well as some of the other amendments to the Income Tax Act brought about by the Finance Act, 2012 are immature and without thorough thinking on what is required to give boost to the Revenues of the Govt. These measures have shaken up the entire investor and capital generating community – whether Indian or foreign- to the core. Coupled with total policy paralysis and inaction on major changes required to incentivise capital formation, these are certainly the measures that must be cremated and buried till India is ready, it’s economy is robust, live and kicking. What I am surprised at is where was Chetan when the Bill was debated in the Parliament and where were all the investors? I recall so many stakeholders and mandarins of industry congratulating Pranabda on the day of Budget. I wish they were more forthcoming with real comments.

  11. drparasjain says:

    Notorious for speaking wrong things at wrong time , Chetan Bhagat himself is a fool , who being a NON Reliable Indian thinks that his word is the gospel – the lord’s truth. Let him face the facts . In China Vodafone would not have dared to do what they did to India. They would be lynched or roasted alive in that country. In India , they buy a company through subterfuges of transferring shares of phony companies in tax havens boast of profit in their Overseas financial statements even declare dividend and yer get supporters from Industry and Media and of course Chetan Bhagat because they have vested interest in painting India as a failed country.

  12. Avinash Rajopadhye says:

    “Please remember, when the foreign investment was not there we did not eat lizard….. Therefore, we are not in that desperate a situation that a country of 1.2 billion people will be treated as a tax haven like Cayman Islands, Isle of Man or Virgin Island. We cannot be equated with them,” the finance minister said. What does it indicate ? the real intention behind the retrospective amendments and GAAR provisions is just to flount the world that we are sovereign country. The approach of Pranavda is more of patriotic than economic.What happened then the world responded with ” three boos” and that followed devaluation of rupee and exodus of foreign investors.

  13. gopal nathani says:

    I agree with Chetan Bhagat views.
    GAAR is complete nonsense and all retrospective amendments must be made prospective asap.
    The entire Finance Act 2012 amendments must be rolled back and the bills must be re-presented instead. Ruling Govt. has nothing to lose and perhaps it has everything to win if it do the same. In fact the international scene may even demage the national scene. There is urgent need to roll back without waiting.

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