Introduction to General Anti-Avoidance Rule

• GAAR is a significant part of the Income Tax Act, 1961.
• The Department of Revenue, under the aegis of the Finance Ministry, is responsible for formulating the rules under GAAR.
• The primary objective of GAAR is to prevent significant revenue losses to the exchequer due to aggressive tax avoidance tactics employed by corporations.
• The proposal for GAAR was initially put forward in the Direct Tax Code 2009, but it was only introduced in India during the Budget session of Parliament in 2012.
• A committee headed by Parthasarathy Shome reviewed the proposals and suggested a delay of three years to prepare the necessary administrative machinery and provide adequate training to officials for effective implementation.
• GAAR was implemented in 2017 and has been applicable since the assessment year 2018 – 19.

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The Rationale Behind GAAR's Introduction in India

• Many countries around the world have specific anti-tax avoidance laws in place. For instance, Australia has had such a law since 1981.
• The introduction of GAAR in India was triggered by the Vodafone-Hutchison-Essar deal that took place in the Cayman Islands.
• The government estimates that it lost over USD 2 billion in taxes due to this deal.
• Subsequently, the Supreme Court ruled in favour of Vodafone in the ensuing legal battle.

The Difference Between Tax Avoidance and Tax Evasion

• Tax evasion refers to the illegal act of not paying taxes that are due to the government. This is a criminal offense and is punishable by law.
• Tax avoidance, on the other hand, refers to the legal practice of minimizing tax liability through lawful methods. An example of tax avoidance would be an individual investing a portion of their income in certain funds to reduce their taxable income.
• However, when large corporations engage in aggressive tax avoidance, the government suffers significant revenue loss.
• GAAR is specifically designed to curb transactions whose primary purpose is to avoid tax.

The Proposals of GAAR

• GAAR primarily aims to levy taxes on arrangements that primarily seek to gain a tax benefit and lack commercial substance.
• GAAR can be invoked if business principles are not adhered to with the objective of avoiding tax.
• For foreign investors, GAAR applies only to those who have not availed benefits under Double Taxation Avoidance Agreements (DTAA).

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Procedure for Invoking GAAR

• The Assessing Officer refers a potential GAAR case to the Tax Commissioner.
• Upon confirming that the arrangement is an impermissible avoidance arrangement (IAA), the Income Tax Commissioner issues a notice to the taxpayer.
• The taxpayer is then required to submit documents to prove that the arrangement is not an IAA.
• If the IT Commissioner is not satisfied with the taxpayer's explanation, he can refer the case to the Approving Panel.
• The Panel reviews the case and provides directions that are binding on both the taxpayer and the tax authorities.
• The Assessing Officer then issues an order to the taxpayer based on the Panel's directions.

Criticisms Against GAAR

• Anti-tax avoidance regulations like GAAR are difficult to implement due to the challenge in distinguishing between various forms of avoidance practices.
• The distinction between objectionable and permissible tax avoidance is often blurred, leading to confusion.
• GAAR has been criticized for being too stringent, potentially discouraging investment and economic growth.
• There are also concerns that tax officers could misuse GAAR to harass taxpayers.

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