RAJIV GANDHI NATIONAL UNIVERSITY

OF LAW PUNJAB, PATIALA

TOPIC -

General Anti Avoidance Rule

GROUP NO- 20

SUBMITTED To: SUBMITTEDBY:

Dr.GAGAN PREET
Rohit Meena
Assistant Professor of Law 15171
 Contents

 INTRODUCTION ........................................................................................................................... 3
Meaning of GAAR .................................................................................................................... 3
BACKGROUND AND ORIGIN ...................................................................................................... 3
Objective of GAAR ................................................................................................................... 5
 NEED FOR GAAR IN INDIA ........................................................................................................ 5
 Difference Between SAAR And GAAR .......................................................................................... 6
 SUGGESTIONS AND RECOMMENDATIONS ........................................................................... 6
 CONCLUSION .............................................................................................................................. 10

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 INTRODUCTION

Meaning of GAAR

GAAR is General Anti Avoidance Rule and hence it is an anti-tax avoidance regulation. As the
name suggests, it is set of laws aimed at curtailing tax avoidance in general. GAAR is set of rules
under the Income Tax Act( under the proposed Direct Tax Code ) which empowers the revenue
authorities to deny tax benefits transactions or arrangements which do not have any commercial
substance or consideration other than achieving the tax benefit.

Thus, in nutshell, we can say that GAAR usually consists of a set of broad rules which are based
on general principles to check the potential avoidance of the tax in general.

GAAR is intended to target tax evaders, especially Indian companies and investors trying to
route investments through Mauritius or other tax havens in order to avoid taxes. GAAR is
typically a statutory rule that empowers a revenue authority to deny taxpayers the benefit of an
arrangement that they have entered into for an impermissible tax-related purpose.

Background And Origin

The scope of the proposed GAAR provisions is exceptionally wide. The introduction of the
GAAR in the present form is likely to create uncertainty about the tax implications of various
business and non-business transactions / arrangements.

This would not only create practical difficulty for the taxpayers, in the current economic
scenario, such provisions could create a negative environment against the efforts of increasing
domestic as well as foreign inward investments. The Supreme Court has in Vodafone’s case also
observed that Foreign Direct Investment (FDI) “flows towards location with a strong governance
infrastructure which includes enactment of laws and how well the legal system works. Certainty
is integral to rule of law.

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Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is
crucial for taxpayers (including foreign investors) to make rational economic choices in the most
efficient manner. Investors should know where they stand. It also helps the tax administration in
enforcing the provisions of the taxing laws.” A holistic view, therefore, needs to be taken in the
matter.

Therefore, the proposal on GAAR provisions needs to be considered in this context and viewed
from this larger angle. The moot question arises is whether, at this stage, the approach of
introducing the GAAR in the Indian Tax Law is correct or whether it is better to adopt a targeted
approach and expand the scope of SAARs. If it is felt necessary to introduce GAAR provisions, a
further question, which needs consideration is, whether it is wise to introduce these in the present
form in the Indian tax scenario. The recommendations given in this paper should also be viewed
against this background.

The principles regarding what constitutes an impermissible tax avoiding mechanism have been
laid down by the Courts in different countries, with a series of decisions of the English Courts
starting from the Duke of Westminster’s1case.

In India also, the ruling of the Supreme Court in McDowell’s case2 was a watershed. This ruling
itself has been interpreted by different courts including the Supreme Court in various subsequent
decisions. In its recent ruling in the famous Vodafone case3, the Supreme Court has stated that
GAAR is not a new concept in India as the country already has a judicial anti-avoidance history.

With the increasing globalisation of economies and growth in cross border transactions, some
countries have introduced legislation which has empowered the Revenue Authorities to question
transactions and arrangements and disregard their form to deny tax benefit unless the taxpayer
can establish the commercial legitimacy of the transaction.

It is common for taxpayers to arrange their affairs in a way that will give them tax benefits,
which are through genuine and legitimate actions. Over the past few years it has been noticed

1
Duke of Westminster v. Inland Revenue, 19 T.C. 490 (H.L.) (U.K.).
2
McDowell & Co. Ltd. v. Commercial Tax Officer, AIR 1986 SC 649 (Supreme Court of India).
3
Supra note vi.

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that the Revenue Authorities have attempted to deny tax benefits, whether under the tax treaty or
domestic law, by disregarding the form and looking through the transactions. However, genuine
transactions consummated in a tax efficient manner need to be distinguished from sham
transactions or colourable devices used for evading tax. The approach of Revenue Authorities
has resulted in protracted litigation and uncertainty. The Revenue Authorities’ attempts in this
regard have not succeeded in most cases, especially in the Supreme Court, the most recent being
in the Vodafone case.

Objective of GAAR

The objective of this paper is confined to the analysis of GAAR provisions in the Code accompanied with
suggestions and recommendations proposed in the introduction of the GAAR. Tax which is one the most
sophisticated means of revenue collection rights of the Government which helps in the development of many
macro and micro economic factors needs to center stage the basic idea of exploitation of the taxpayer is means to
economic growth.

Thus it becomes important to identify and introduce specific measures that would restrict taxpayers from entering
such kind of arrangements and transactions. The famous verdict of Supreme Court in the Vodafone ruling has
undoubtedly given aplenty of work to the policy makers and tax authorities which acknowledged that strategic tax
planning.

The sobriety in articulation of the GAAR requires material discussion amongst the stakeholders before it gets
penned. Taking lessons from the countries who have implemented GAAR have taken substantial time in its
stabilization. Having said that it becomes certain that the stakeholders need awareness on the subject to keep
themselves away from any unforeseen scenario which can further result to unfavorable consequences. Hence
restating the objective of this paper which in its all form is drafted to educated and address the quandaries of impact
of GAAR.

NEED FOR GAAR IN INDIA

The need for a GAAR is usually justified by a concern that the integrity of the tax system of a
country needs to be stabilized strengthened. This in turn usually reflects a judgment by the
Government and Parliament that existing laws, judicial practice and tax administration are not
considered adequate to address current challenges and the anticipated requirements of future

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generations. Inevitably such a judgment is controversial because of the different interests and
opinions that are to be balanced between the community as represented by the Government and
the Revenue on the one hand and on the other, specific elements of the tax base, such as citizens
and more particularly business, residents and non-residents.

Legislatures in various countries are moving towards promulgating General Anti-Avoidance

Rules. Courts in India have examined the issue of tax avoidance and laid down the principles as
to what constitutes tax avoidance. In light of the various judicial precedents, the tax authorities in
India tend to raise the issue of tax avoidance and deny relief to the taxpayer. Given the
uncertainties involved in such application, it is imperative for the proposed GAAR to be
successful; it should not impact genuine business transactions or promote uncertainty. One of the
key objectives for introducing the Direct Tax Code, which GAAR is a part of, is to simplify the
language to enable better comprehension and remove ambiguity to foster voluntary compliance,
thus reducing litigation.

Difference Between SAAR And GAAR

India had provisions on similar lines of GAAR known as Specific Anti-Avoidance Rule (SAAR), which was
made by judges to deal with such issues and eventually got incorporated in the Income- tax Act, 1961.SAAR is a
set of rules specifically designed to target to arrangements of tax avoidance.

The features where SAAR and GAAR can be distinguished are discussed below: SAAR by its form are more
precise and specific and therefore it helps in minimizing time as well as cost judicial proceedings. Since SAAR is
more precise in form it definitely provides assurance to the taxpayer while arranging or formalizing the agreement.
There fore not involving in any kind of litigations.

SUGGESTIONS AND RECOMMENDATIONS

An expert panel set up by former Prime Minister Manmohan Singh to review the provisions of
the GAAR — or rules to prevent tax evasion — has recommended that they be put off by three
years, a move that’s expected to soothe the nerves of jittery foreign investors and help boost
sentiment.

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The panel, headed by tax expert Parthasarathi Shome director and chief executive, Indian
Council for Research on International Economic Relation, which submitted its report to the
finance ministry on Saturday, also said that GAAR provisions should not apply to examine the
genuineness of the residency of an entity set up in Mauritius. Experts say this clause is expected
to calm foreign investors who route their investments through Mauritius, with whom India has a
double-tax avoidance treaty.

The Shome committee also suggested that GAAR should only cover arrangements where the
main purpose is to obtain a tax benefit, not those in which this is merely one of the purposes. It
has also recommended a monetary threshold of Rs. 3 crore of tax benefit (tax only, not interest,
etc.) to a taxpayer in a year for applying GAAR provisions.

The panel recommended abolition of the tax on gains arising from transfer of listed securities,
whether capital gains or business income, to both residents as well as non-residents.

Explaining why it wanted GAAR deferred, the committee said, “GAAR is an extremely
advanced instrument of tax administration — one of deterrence, rather than for revenue
generation — for which intensive training of tax officers who would specialize in the finer
aspects of international taxation is needed.”

GAAR has been a matter of investor anxiety as it was feared that the proposed rules would be
used to open up investigations into the source of incoming investments. Recognizing the
potential damage that this could do to investment inflows, the government has been trying to
undo the damage caused by some of the taxation proposals in the 2012-13 Budget.

GAAR and retrospective changes to tax laws have attracted criticism globally, in the wake of
which the Prime Minister had set up the Shome committee in July to consult stakeholders, study
the provisions of GAAR and make its recommendations for necessary changes in the rules.

The Shome panel said the application of modified GAAR from 2016-17 should be announced
now. “In effect, GAAR would apply from the assessment year 2017-18. Pre-announcement is a
common practice internationally in today’s global environment of freely flowing capital,” the
report said.

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“It would be perspicacious, as indicated above, for the government to postpone the
implementation of GAAR for three years with an immediate pre-announcement of the date to
remove any uncertainty from the minds of stakeholders,” it said.

The panel felt that a longer period of preparation should enable taxpayers to plan for a change in
the anti-avoidance regime that would allow legitimate tax planning reflecting a proper
understanding of the new legislation and guidelines, while doing away with dubious tax
avoidance arrangements.

Experts cheered the move saying the panel report would go a long way in assuring investors
about the predictability of tax policies.

Experts also lauded the Shome committee’s recommendation of broad-basing the approving
panel for GAAR by including two independent members. The committee said the approving
panel should consist of five members, including a chairman. The chairman should be a retired
judge of the high court, two members should be from outside government (persons of eminence
drawn from the fields of accountancy, economics or business with knowledge of income tax
issues) and two members should be chief commissioners of income tax or one chief
commissioner and one commissioner.

“The approving panel should be a permanent body with a secretariat. It should have a two-year
term. A decision of the approving panel should occur by a majority of members,” the panel said.

It also said that GAAR provisions should be subject to an overarching principle that tax
mitigations should be distinguished from tax avoidance before invoking GAAR. It added that an
assessing officer should not invoke GAAR where the tax payer submits a satisfactory
undertaking to pay tax along with interest in case it is found that GAAR provisions are
applicable in relation to the remittance during assessment proceedings. An assessing officer may
invoke GAAR with the prior approval of the commissioner in case the tax payer does not submit
any satisfactory undertakings.

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The Shome committee said that training programmes should be started for all assessing officers
in the area of international taxation to minimize the deficiency of trust between the tax
administration and taxpayers.

“The recommendations of the committee clearly indicates the responsiveness on the business
concern. If implemented, it could go a long way to help the business climate and establish the
credibility that is needed most at this time,” said Rahul Garg, leader, direct tax, at PwC, India.

Parthasarathi Shome, head of the expert committee on General Anti Avoidance Rules (GAAR)
that recommended deferring the controversial tax provision by three years and abolition of
capital gains tax on transfer of securities, spoke to Economic Times Now shortly after submitting
the report on Saturday, 1stSeptember 2012. Excerpts4:

1. Investors were concerned about the timelines to implement GAAR. Did you keep jittery
FIIs in mind while recommending that it be postponed by three years?
2. I think GAAR is a very incisive deterrent instrument; it’s not a revenue-generating
instrument. Overall, international taxation requires knowledge and application skills for
which we have to develop a band of brilliant tax officers. Taxpayers with the habit of
concocting tax avoidance schemes that are egregious should also be allowed to adjust to
the newly emerging environment of anti-tax avoidance.

They have certain investments that are reflective of avoidance so they will get time to get rid of
these. Also, the three-year postponement should be announced now for the benefit of all. All
members including Mr (N) Rangachary, who is a former CBDT chairman, have agreed to this.
We have had very exhaustive exchanges with all stakeholders and most have pleaded for this
time. Though some stakeholders like Assocham said GAAR should not be implemented at all,
others suggested a five or seven-year abeyance.

4
Suchetana Ray, ‘Three Years Enough To Prepare For GAAR: Parathasarathi Shome’, 2 nd September, 2012
available at http://economictimes.indiatimes.com/opinion/interviews/three-years-enough-to-prepare-for-gaar-
parthasarathi-shome/articleshow/16156506.cms

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 CONCLUSION

Therefore the proposal of GAAR provisions needs more attention and it can definitely impact a lot of macro
as well as micro factors. Will it be a blessing or a burden to our next generations is what we need to keep in
mind and have a holistic view towards drafting of the same. The vital question which arises to all of us is that: How
wise would it be to introduce the GAAR with its present form in the Indian Tax Law in current economic
scenarios?

At this stage of introducing any Anti-avoidance Rule, it would be better to introduce Specific Anti-
Avoidance Rules with reference to certain specific arrangements which the Government may have professed to be
tax avoidance arrangements and confine the application of Anti-avoidance Rule to such cases. As against a
GAAR, Specific Anti-Avoidance Rules give confidence to the taxpayers and also help in reducing litigation.

Another important point that cannot be over looked is that GAAR is being perceived as a revenue
generating method of the government to match their checks and balances and hence it defeats the purpose. The
better way to look at things would be involve all the stakeholders and ask for their contribution in formulating and
implementations of the same.

This will further smoothen the process and infuse confidence in the stakeholders in the governance of the land. In
many developed economies such practice has been adapted and that has yielded a response which has far-
reaching implications. Therefore, in Indian context it is recommended to adapt Specific Anti-
Avoidance Rules which is already exists and only needs to be expanded rather than introducing broad
based General Anti- Avoidance Rules

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