Write up on GAAR in India

Dated 15th January 2013

General Anti-Avoidance Rules

Some of recent developments about GAAR are:-

(a) 16th March, 2012: Finance Minister, Pranab Mukherjee takes a tough stand and announces that the government will crack down on tax avoidance effective from fiscal year 2012-13
(b) 7th May, 2012: Finance Minister, Pranab Mukherjee forced to eat his words and agreed to defer GAAR by a year as his announcements spooked oversea investors
(c) 28th June, 2012: Finance Ministry releases first draft on GAAR; There is wide criticism of the provisions.
(d) 14th July, 2012 : PM, Dr. Man Mohan Singh, forms review committee under Parthasarathi Shome, for preparing a second draft by 31st August and final guidelines by 30th September, 2012
(e) 1st September, 2012: Shome Committee recommends deferring GAAR by three years. It also recommends some more investor friendly measures
(f) 14th Jan, 2013: Finance minister announces deferring GAAR until 2016. It is unanimously welcomed by India Inc.

GAAR in simple terms:

Tax Avoidance is an area of concern across the world. The rules are framed in different countries to minimize such avoidance of tax. Such rules in simple terms are known as “General Anti Avoidance Rules” or GAAR. Thus GAAR is a set of general rules enacted so as to check the tax avoidance.
GAAR has been in prominence in last few years as Indian Government has taken initiative to introduce GAAR or General Anti Avoidance Rules with a view to increase tax collections.

Lord Tomlin has well said “Every man is entitled to order his affairs so that tax attaching under the appropriate Acts is less than it otherwise would be” (IRC v Duke of Westminster). People adopt various methods so that they can reduce their total tax liability.
The methods adopted to reduce their tax liability can be broadly put into four categories: “Tax Evasion”; “Tax Avoidance”, “Tax Mitigation” and “Tax Planning”. The difference between these four methods sometimes becomes blurred owing to the perception of the tax authorities and / or tax payer. GAAR refers to the second category i.e. tax avoidance.

Difference between GAAR and SAAR?

Anti-Avoidance Rules are broadly divided into two categories namely “General” and “Specific”. Thus, legislation dealing with “General” rules are termed as GAAR, whereas legislation dealing with “Specific avoidance are termed as “SAAR”. In India till recently SAAR was in vogue i.e. laws were amended to plug specific loopholes as and when they were noticed or were misused enmasse. However, now Indian tax authorities wants to move towards GAAR but are facing severe opposition as tax payers fear that these will be misused by tax authorities by giving arbitrary and wide interpretations. We can say SAAR being more specific provides certainty to taxpayers whereas GAAR being general in nature can be misused and is subject to arbitrary interpretation by tax authorities.

In India, the real discussions on GAAR came to light with the release of draft Direct Taxes Code Bill (popularly known as DTC 2009) on 12th August 2009. It contained the provisions for GAAR. Later on the revised Discussion Paper was released in June 2010, followed by tabling in the Parliament on 30th August, 2010, a formal Bill to enact the law known as the Direct Taxes Code 2010. The same was to be made applicable w.e.f 1st April, 2012. However, owing to negative publicity and pressures from various groups, GAAR was postponed to at least 2013, and was likely to be introduced along with the Direct Tax Code (DTC) from 1st April 2013. Moreover, an Expert Committee has been set by Prime Minister (Manmohan Singh) in July 2012 to vet and rework the GAAR guidelines issued in June 2012. The latest reports (September 2012) indicates, it may not be implemented even for 3 years i.e. this will be postponed for 3 years (2016-17).

GAAR – Example

To make it easier to understand GAAR; we can say that suppose a person or a company is setting up business in Gulf Country and its clear intention is to claim exemption from capital gains tax, in such a scenario Indian govt. has the right to deny the legitimate claim for exemption provided under DTAA as it falls under tax avoidance and Indian govt. is trying to plug the loopholes.

SOURCE: GOVT. OF INDIA, Ministry of Finance


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