The General Anti-Avoidance Rule (GAAR) is an anti-tax avoidance law in India. It came into effect on 1st April 2017. In this article, we present all the important information about this law for the IAS exam. This comes under both economy and governance sections of the UPSC syllabus.
General Anti-Avoidance Rule – Introduction
- The GAAR provisions come under the Income Tax Act, 1961.
- The Department of Revenue under the Finance Ministry frames the rules under GAAR.
- It is specifically aimed at cutting revenue losses that happen to the exchequer due to aggressive tax avoidance measures practiced by companies.
- GAAR was initially proposed in the Direct Tax Code 2009, although it was introduced into India in the Budget session of Parliament in 2012.
- A committee under Parthasarathy Shome was set up to review the proposals. It recommended deferring the proposals to three more years citing a need to establish the administrative machinery necessary and training for officials for a full-scale implementation.
- It came into effect in 2017 and is applicable from the assessment year 2018 – 19.
Why was GAAR introduced in India?
- Many countries have specific anti-tax avoidance laws to various degrees.
- Australia has one since 1981.
- The GAAR was introduced in India after the Vodafone deal with Hutchison-Essar. This deal took place in the Cayman Islands.
- As per the government, above USD 2 billion were lost in taxes.
- In the subsequent case, the Supreme Court ruled in favour of Vodafone.
Tax Avoidance versus Tax Evasion
- Tax evasion is when a person or entity does not pay the taxes that is due to the government. This is illegal and liable to prosecution.
- Tax avoidance is where entities try to avoid tax by taking recourse to legal actions. Tax avoidance is not illegal. For example, a salaried employee investing a part of his income in some funds can be called tax avoidance.
- However, when aggressive tax avoidance is practiced by large corporates, there is a huge revenue loss for the government.
- GAAR is specifically against transactions where the sole intention is to avoid tax.
- GAAR investigates imposition of taxes on those types of arrangements that are chiefly aimed to avail a tax benefit or those doesn’t have any commercial substance.
- GAAR can also be invoked if some good business principles are not followed with tax avoidance objectives.
- In case of foreign investors, GAAR is applicable only to those who have not taken benefits under Double Taxation Avoidance Agreements (DTAA).
GAAR Invoking Procedure
- The Assessing Officer makes a reference to the Tax Commissioner about a potential GAAR case.
- The Income Tax Commissioner issues a notice to the taxpayer after confirming that the arrangement is impermissible avoidance arrangement (IAA).
- The taxpayer then files documents showing that the arrangement is not IAA.
- If the IT Commissioner is not satisfied with the explanation, the case can be referred by him to the Approving Panel.
- The Panel examines the case and then gives his directions which are applicable to the taxpayer and the tax authorities.
- Then, the Assessing Officer makes an order to the taxpayer.
- Anti-tax avoidance regulations are difficult to implement as it is hard to differentiate between different types of avoidance practices.
- The line of difference between an objectionable and a permissible avoidance is very thin.
- Another criticism is that it is too harsh a law.
- There is also another fear that tax officers can harass people using this law.