The issue of the General Anti Avoidance Rule (GAAR) has dominated the news recently and there are fears that GAAR will discourage foreign investment in India. However, tax avoidance can hinder public finance objectives and it is in this context GAAR was introduced in this year’s Budget. Last week, the Finance Minister pushed back the implementation of GAAR by a year. What is GAAR? GAAR was first introduced in the Direct Taxes Code Bill 2010. The original proposal gave the Commissioner of Income Tax the authority to declare any arrangement or transaction by a taxpayer as ‘impermissible’ if he believed the main purpose of the arrangement was to obtain a tax benefit. The 2012-13 Finance Bill (Bill), that was passed by Parliament yesterday, defines ‘impermissible avoidance arrangements’ as an arrangement that satisfies one of four tests. Under these tests, an agreement would be an ‘impermissible avoidance arrangement’ if it (i) creates rights and obligations not normally created between parties dealing at arm’s length, (ii) results in misuse or abuse of provisions of tax laws, (iii) is carried out in a way not normally employed for bona fide purpose or (iv) lacks commercial substance. As per the Bill, arrangements which lack commercial substance could involve round trip financing, an accommodating party and elements that have the effect of offsetting or cancelling each other. A transaction that disguises the value, location, source, ownership or control of funds would also be deemed to lack commercial substance. The Bill as introduced also presumed that obtaining a tax benefit was the main purpose of an arrangement unless the taxpayer could prove otherwise. Why? GAAR was introduced to address tax avoidance and ensure that those in different tax brackets are taxed the correct amount. In many instances of tax avoidance, arrangements may take place with the sole intention of gaining a tax advantage while complying with the law. This is when the doctrine of ‘substance over form’ may apply. ‘Substance over form’ is where real intention of parties and the purpose of an arrangement is taken into account rather than just the nomenclature of the arrangement. Many countries, like Canada and South Africa, have codified the doctrine of ‘substance over form’ through a GAAR – type ruling. Issues with GAAR A common criticism of GAAR is that it provides discretion and authority to the tax administration which can be misused. The Standing Committee responded to GAAR in their report on the Direct Taxes Code Bill in March, 2012. They suggested that the provisions should ensure that taxpayers entering genuinely valid arrangements are not harassed. They recommended that the onus should be on tax authorities, not the taxpayer, to prove tax avoidance. In addition, the committee suggested an independent body to act as the approving panel to ensure impartiality. They also recommended that the assessing officer be designated in the code to reduce harassment and unwarranted litigation. GAAR Amendments On May 8, 2012 the Finance Minister amended the GAAR provisions following the Standing Committee’s recommendations. The main change was to delay the implementation of GAAR by a year to “provide more time to both taxpayers and the tax administration to address all related issues”. GAAR will now apply on income earned in 2013-14 and thereafter. In addition, the Finance Minister removed the burden upon the taxpayer to prove that the main purpose of an alleged impermissible arrangement was not to obtain tax benefit. These amendments were approved with the passing of the Bill. In his speech, the Finance Minister stated that a Committee had also been formed under the Chairmanship of the Director General of Income Tax. The Committee will suggest rules, guidelines and safeguards for implementation of GAAR. The Committee is expected to submit its recommendations by May 31, 2012 after holding discussions with various stakeholders in the debate.
Yesterday, Members of Parliament in Lok Sabha discussed the situation of drought and drinking water crisis in many states. During the course of the discussion, some MPs also raised the issue of ground water depletion. Last month, the Bombay High Court passed an order to shift IPL matches scheduled for the month of May out of the state of Maharashtra. The court cited an acute water shortage in some parts of the state for its decision. In light of water shortages and depletion of water resources, this blog post addresses some frequently asked questions on the extraction and use of ground water in the country. Q: What is the status of ground water extraction in the country? A: The rate at which ground water is extracted has seen a gradual increase over time. In 2004, for every 100 units of ground water that was recharged and added to the water table, 58 units were extracted for consumption. This increased to 62 in 2011.[1] Delhi, Haryana, Punjab and Rajasthan, saw the most extraction. For every 100 units of ground water recharged, 137 were extracted. In the recent past, availability of ground water per person has reduced by 15%. In India, the net annual ground water availability is 398 billion cubic metre.[2] Due to the increasing population in the country, the national per capita annual availability of ground water has reduced from 1,816 cubic metre in 2001 to 1,544 cubic metre in 2011. Rainfall accounts for 68% recharge to ground water, and the share of other resources, such as canal seepage, return flow from irrigation, recharge from tanks, ponds and water conservation structures taken together is 32%. Q: Who owns ground water? A: The Easement Act, 1882, provides every landowner with the right to collect and dispose, within his own limits, all water under the land and on the surface.[9] The consequence of this law is that the owner of a piece of land can dig wells and extract water based on availability and his discretion.[10] Additionally, landowners are not legally liable for any damage caused to water resources as a result of over-extraction. The lack of regulation for over-extraction of this resource further worsens the situation and has made private ownership of ground water common in most urban and rural areas. Q: Who uses ground water the most? What are the purposes for which it is used? A: 89% of ground water extracted is used in the irrigation sector, making it the highest category user in the country.[3] This is followed by ground water for domestic use which is 9% of the extracted groundwater. Industrial use of ground water is 2%. 50% of urban water requirements and 85% of rural domestic water requirements are also fulfilled by ground water. 
The main means of irrigation in the country are canals, tanks and wells, including tube-wells. Of all these sources, ground water constitutes the largest share. It provides about 61.6% of water for irrigation, followed by canals with 24.5%. Over the years, there has been a decrease in surface water use and a continuous increase in ground water utilisation for irrigation, as can be seen in the figure alongside. [4] Q: Why does agriculture rely most on ground water? A: At present, India uses almost twice the amount of water to grow crops as compared to China and United States. There are two main reasons for this. First, power subsidies for agriculture has played a major role in the decline of water levels in India. Since power is a main component of the cost of ground water extraction, the availability of cheap/subsidised power in many states has resulted in greater extraction of this resource.[5] Moreover, electricity supply is not metered and a flat tariff is charged depending on the horsepower of the pump. Second, it has been observed that even though Minimum Support Prices (MSPs) are currently announced for 23 crops, the effective price support is for wheat and rice.[6] This creates highly skewed incentive structures in favour of wheat and paddy, which are water intensive crops and depend heavily on ground water for their growth. It has been recommended that the over extraction of ground water should be minimized by regulating the use of electricity for its extraction.[7] Separate electric feeders for pumping ground water for agricultural use could address the issue. Rationed water use in agriculture by fixing quantitative ceilings on per hectare use of both water and electricity has also been suggested.[8] Diversification in cropping pattern through better price support for pulses and oilseeds will help reduce the agricultural dependence on ground water.[6] [1] Water and Related Statistics, April 2015, Central Water Commission, http://www.cwc.gov.in/main/downloads/Water%20&%20Related%20Statistics%202015.pdf. [2] Central Ground Water Board website, FAQs, http://www.cgwb.gov.in/faq.html. [3] Annual Report 2013-14, Ministry of Water Resources, River Development and Ganga Rejuvenation, http://wrmin.nic.in/writereaddata/AR_2013-14.pdf. [4] Agricultural Statistics at a glance, 2014, Ministry of Agriculture; PRS. [5] Report of the Export Group on Ground Water Management and Ownership, Planning Commission, September 2007, http://planningcommission.nic.in/reports/genrep/rep_grndwat.pdf. [6] Report of the High-Level Committee on Reorienting the Role and Restructuring of Food Corporation of India, January 2015, http://www.fci.gov.in/app/webroot/upload/News/Report%20of%20the%20High%20Level%20Committee%20on%20Reorienting%20the%20Role%20and%20Restructuring%20of%20FCI_English_1.pdf. [7] The National Water Policy, 2012, Ministry of Water Resources, http://wrmin.nic.in/writereaddata/NationalWaterPolicy/NWP2012Eng6495132651.pdf. [8] Price Policy for Kharif Crops- the Marketing Season 2015-16, March 2015, Commission for Agricultural Costs and Prices, Department of Agriculture and Cooperation, Ministry of Agriculture, http://cacp.dacnet.nic.in/ViewReports.aspx?Input=2&PageId=39&KeyId=547. [9] Section 7 (g), Indian Easement Act, 1882. [10] Legal regime governing ground water, Sujith Koonan, Water Law for the Twenty-First Century-National and International Aspects of Water Law Reform in India, 2010.
