This article was written by Aman Saini, New Law College, BVPDU, Pune.
General Anti-Avoidance Rule (GAAR) implies anti-tax avoidance rules. It consists of set of laws which prevents the tax avoidance in general. The GAAR has been introduced because the judiciary is not omni-present, i.e., it is not possible for the judiciary to always keep a track of transactions which have a sole purpose of tax-avoidance only. GAAR is a set of rules under Income Tax Act, 1961 (ITA) which gives power to the revenue department to impede such tax benefit transactions or arrangements which does not consist of any commercial substance or consideration except achievement of tax benefit.
Effective from April 1st, 2017, GAAR applies on the transactions which result in tax reductions, but are prima facie legal. Tax reduction is a tool which is used to avoid or reduce the tax burden on a company or an individual. GAAR is needed because tax reduction or avoidance is legal and due to this reason, the government has to bare large scale revenue losses. The Government of India introduced the anti-avoidance rule to keep a check on revenue losses because of excessive avoidance by the corporate bodies. Section 95 to 102 under chapter X-A of the Income Tax Act, 1961 contains the provisions for GAAR and the relevant procedures for application of GAAR and the conditions where it shall not apply, have been given in Rules 10U to 10UC of The Income Tax Rules, 1962.
In India, the concept of GAAR was introduced by the DTC Bill, 2009 which was later revised with the DTC Bill, 2010. The intention of the bill was to introduce the GAAR with DTC on 1st April 2012. The provisions for GAAR was introduced in the budget of 2012-13 by Dr. Pranav Mukherjee who was the Finance Minister at that time. But several of the provisions were criticized as there was lack of clarity, safeguards, etc.
Afterwards, a panel was set up by the government under Parthasarathy Shome for reviewing the proposal. The committee suggested that it needs more time and suggested for the intensive training of officials.
The GAAR became effective in the financial year 2017-18 onwards, almost eight years after it was introduced in the Direct Tax Code Bill (DTC), 2009.
NEW GAAR NOTIFICATIONS-
GAAR scrutinizes the imposition of taxes on the transactions or arrangements whose primary aim is to earn tax benefit or the transactions which doesn’t have any commercial substance. So, if there is no other good business motive (arm’s length principle, bona fide transaction, expansion of business, etc.) except tax avoidance, GAAR will be invoked. In case of Foreign Investors, GAAR would apply only to those who have not taken the benefit of Double Taxation Avoidance Agreements (DTAA)
IMPERMISSIBLE AVOIDANCE ARRANGEMENT–
Section 96 of the Income Tax Act, 1960 states the provisions for IAA. As per the provisions, IAA means an arrangement having the main purpose of obtaining a tax benefit and:
- It creates rights, or obligations, which are ordinarily not created between parties dealing at arm’s length;
- Results which are directly or indirectly misusing or abusing the provisions of the Income Tax Act.
- Commercial substance is lacking partly or wholly;
- An arrangement which is carried out or entered into in a manner which are not ordinarily employed for bona fide purposes.
Commercial substance is a business transaction which alters the future cash flow of the business. The tax avoidance transactions generally lacks the commercial substance as they have nothing to do with changing cash flow of the business. Section 97 of the Income Tax Act, 1961 deals with the transactions lacking commercial substance. According to the section, the transactions are:
- The substance or effect of the arrangement as a whole, is inconsistent with or differs from, the form of its individual steps;
- The transaction may deem to lack commercial substance if it involves round trip financing, an accommodating party, elements that have effect of offsetting or canceling each other or a transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction.
Round trip financing includes the transfer of funds between the parties of the arrangement and the aftermath of the transfer is the tax benefit.
NON-APPLICABILITY OF GAAR-
In following situations, the provisions of GAAR will not apply:
- An arrangement where the tax benefit in the pertinent financial year arises, in aggregate to all the parties to the arrangement is not more than rupees three Crores.
- It shall not be applicable to Foreign Institutional Investors (FII):
- Who is assessee under the Income Tax Act.
- Who did not avail the benefit of DTAA.
- Who has invested in unlisted or listed securities.
- A non-resident, in relation to investment made by him by way of offshore derivative instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor.
- Any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of investments made before the 1st day of April, 2017 by such person.
GAAR is an unconventional type of legislation as it puts the discretionary powers in the hands of tax administrators. Now, because of GAAR, the tax authority has the untamed power of questioning any and all transaction or arrangement. The burden of proof lies on the assessee to show that the arrangement is not falling under the ambit of Impermissible Avoidance Arrangement (IAA) which can be quite burdensome but it will also produce the chances for the tax payers to evaluate
 Naresh Ajwani, Applicability of GAAR-Fundamnetal Requirements, Rashmin Singhvi & Associates, http://www.rashminsanghvi.com/downloads/taxation/international-taxation/article-GAAR-applicability-CTC.html.
 Tojo Jose, Basics on General Anti Avoidance Rule (GAAR), Indian Economy (Jan 29, 2017).
 Gagan Kumar & Rakesh Chhabra, GAAR-Its Time Has Come, Mondaq (Feb 22, 2018). http://www.mondaq.com/india/x/676268/tax+authorities/GAAR+Its+Time+Has+Come.
 Tojo Jose, Basics on General Anti Avoidance Rule (GAAR), Indian Economy (Jan 29, 2017). https://www.indianeconomy.net/splclassroom/basics-on-general-anti-avoidance-rules-gaar-in-india/.
 Tojo Jose, Basics on General Anti Avoidance Rule (GAAR), Indian Economy (Jan 29, 2017), https://www.indianeconomy.net/splclassroom/basics-on-general-anti-avoidance-rules-gaar-in-india/.
 Gagan Kumar & Rakesh Chhabra, GAAR-Its Time Has Come, Mondaq (Feb 22, 2018), http://www.mondaq.com/india/x/676268/tax+authorities/GAAR+Its+Time+Has+Come.