General Anti-avoidance Rule (GAAR)

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Relevance: GS-II: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

General Anti-avoidance Rule(GAAR)

General Anti-Avoidance Rule (GAAR) refers to a framework or a set of rules used by the revenue authorities against aggressive tax planning for the objective of tax avoidance. GAAR targets any financial transaction or business arrangements entered specifically to avoid taxes. It helps the tax authorities in deciding that whether any business arrangement by a commercial entity with its subsidiary or with any other business entity is made to avoid paying taxes to the government.

It is different from tax evasion which is caused because of illegal activities/misrepresentation/suppression/fraud and tax mitigation is because people utilize fiscal incentives to take advantage of tax-efficient zones.

Background of the GAAR

  • The GAAR is mainly intended to prevent tax avoidance by taking the advantage of international tax treaties and laws.
  • According to the GAAR, the government can deny a tax benefit if there is no sound business for that transaction, and the tax authorities can reclassify the profits arising from the transaction.
  • GAAR was initially proposed in the Direct Tax Code 2009, although it was introduced into India in the Budget session of Parliament in 2012.
  • The general anti-avoidance rules have become effective from April 1, 2017. Originally GAAR was intended to be implemented from April 1, 2014. However, its implementation was delayed after the recommendations of the Shome Committee, and the protests from foreign investors.
  • The department of revenue has given the clarification that the provisions of GAAR would not be applied where the investments are made through tax treaties and agreements have a sufficient limitation of benefit.
  • It requires certain investment and employment requirements to be fulfilled so that only the resident companies take its benefits.

Parthasarathi Shome panel

  • The Parthasarathi Shome panel was set up by former prime minister Dr Manmohan Singh in 2012 for constituting the guidelines for the general anti-avoidance rules.
  • It aimed to bring tax clarity and address the concerns of foreign investors.
  • The Shome panel had the responsibility to look into the issues pertaining to the foreign institutional investors and all other non-resident taxpayers.
  • The panel gave several recommendations for the revival of the inflow of foreign investment in India and it advocated for the postponement of the GAAR for three years till 2016-17.

Reasons for bringing GAAR

  • Though legally tax avoidance is not a crime, it was causing huge revenue losses to the government due to aggressive tax planning by the business houses who often use the loopholes of the law to avoid taxes.
  • Anti-avoidance rules have been brought in many countries to check revenue losses to the government.
  • In India, the discussion of GAAR came after the Vodafone tax dispute. Vodafone purchased the Hutch India at 55000 crores. The parent company of Hutch, Hutchinson Hong Kong, was liable to pay capital gains tax to the Indian government.

Difference between Tax avoidance and tax evasion 

  • Tax avoidance refers to an attempt to reduce the tax liability using legal means and regulating the business in such a way as to reduce the tax imposed by the act to the minimum. Tax avoidance uses legal means to avoid the payment of taxes.
  • Whereas tax evasion uses illegal means through falsification of account books, overstatement of deductions, understatement of income to evade the payment of taxes.
  • Most of the corporate companies use tax planning to reduce the payment of taxes. It is a legal practice in which the taxpayers use the loopholes of the tax laws to reduce their tax liability.

Procedure for invoking GAAR

  • 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 an 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 apply to the taxpayer and the tax authorities. Then, the Assessing Officer makes an order to the taxpayer.

Advantages of GAAR

  1. GAAR would enhance the tax revenues of the government by seeking or finding out non-genuine transactions and avoiding taxes. It helps in improving the tax revenues of the government which will add to lessening the fiscal deficits of the government.
  2. GAAR will bring out competitive advantages to several businesses that have been doing genuine transactions. This creates a better economic and business environment for people to recognize that the state exists to bring about genuine investments and transactions having pro-commercial viabilities.
  3. In ease of doing business rank, it will add to the advantage of India being recognized as a more serious country in accepting what is free and fair trade practices rather than only giving free tax advantages to people.
  4. It would improve India's image as it promotes free and fair trade practices rather than just providing free tax benefits to the investors.

Criticism of GAAR

  • Anti-tax avoidance regulations are difficult to implement as it is hard to differentiate between different types of avoidance practices.
  • A common criticism of GAAR is that it provides discretion and authority to the tax administration which can be misused. 
  • There is also another fear that tax officers can harass people using this law.

Way forward

Since GAAR gave more powers to revenue authorities, people have been concerned about wider and arbitrary interpretations that the revenue authorities may have regarding GAAR provisions. Hence, the GAAR provisions are demanded to be brought out in such a manner that they don’t allow arbitrary interpretations that lead to harassment of taxpayers.

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