General Anti-Avoidance Rules (GAAR)

Why in News

• With the government implementing its anti tax avoidance rules from April 1, industry is concerned about the greater subjective authority being given to the tax department and how this could render transactions unprofitable.

 Background

• The General Anti-Avoidance Rules (GAAR) are designed to prevent the avoidance of tax by taking advantage of international tax laws.
• The rules say that if the major outcome of a transaction is a tax benefit and there is no sound business basis for the transaction, then the government can invoke GAAR and reclassify the transaction or the profits arising from it.
• Originally, the rules were supposed to be implemented from April 1, 2014 onwards, but protests from foreign investors meant the implementation was delayed twice.
• Earlier this year, the Income Tax Department issued a set of clarification aimed at clarifying the issues raised by the foreign investors.
• The Department clarified that GAAR will not be invoked in cases where investments are routed through tax treaties that have a sufficient limitation of benefit (LOB).
• Such LOB clauses usually require the investor to meet certain investment and employment requirements so that only resident companies benefit from the deal.

The Big Concern

• The concern is about the arbitrary usage of the powers that the officers might have under GAAR.
• Conceptually, if the power is used judiciously it can’t be anybody’s argument that any anti-avoidance rule is a bad thing.
• Such rules create subjectivity.
• Suppose a transaction makes sound business sense but also results in substantial tax savings, then does it make them a tax evader?
• There could be cases where the tax benefit accrues upfront whereas the business advantages of a transaction could accrue only with a delay.
• In such a case, would the transaction be treated as one conducted purely to evade tax?

The Safeguards

• The government has included several safeguards against bullying by tax authorities, such as several layers of permissions required before GAAR is invoked.
• The assessing officer seeking to apply GAAR has to get her proposal vetted by a principal commissioner and then needs to obtain the approval of a panel headed by a high court judge.

What is GAAR

• General anti-avoidance rule (GAAR) is an anti-tax avoidanceRule of India.
• It is framed by the Department of Revenue under the Ministry of Finance.
• Originally proposed in the Direct taxes code 2009,are targeted at arrangement or transactions made specifically to avoid taxes.
• It was considered controversial because it had provisions to seek taxes from past overseas deals involving local assets retrospectively.
• The regulation allows tax officials to deny tax benefits, if a deal is found without any commercial purpose other than tax avoidance.
• It allows tax officials to target participatory notes.
• Under GAAR, the investor has to prove that the participatory note was not set to avoid taxes.
• It also allows officials to deny double taxation avoidance benefits, if deals made in tax havens like Mauritius were found to be avoiding taxes.

 Why GAAR ?

• Tax avoidance is legal; but now, large scale revenue loss is occurring due to aggressive tax planning by corporate using avoidance opportunities.
• Governments in many countries are introducing anti- avoidance rules to check this revenue loss from excessive avoidance.
• In 2007, Vodafone entered the Indian market by buying Hutchison Essar.
• The deal took place in Cayman Islands.
• The Indian government claimed over US$2 billion were lost in taxes.
• In September 2007, a notice was sent to Vodafone.
• Vodafone claimed that the transaction was not taxable as it was between two foreign firms.
• The government claimed that the deal was taxable as the underlying assets involved were located in India.
• 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 12 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 30 August 2010, a formal Bill to enact the law known as the DirectTaxes Code 2010.

What is 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 “Speicifc avoidnace 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 provide certainty to taxpayers where as GAAR being general in nature can be misused and is subject to arbitrary interpretation by tax authorities.

What is tax avoidance?

• Tax avoidance is deliberate measures to avoid or reduce tax burden by an individual or a company.
• Tax avoidance, is by and large not defined in taxing statutes.
• Tax avoidance is, nevertheless, the outcome of actions taken by the assessee, which is not illegal or forbidden by the law as such. The purpose here is to reduce tax burden.