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Today you will read recent topic: GAAR : General Anti Avoidance Rules
Avoidance is an attempt to reduce tax liability through legal means, i.e. regulating tax related affairs in such a way that one pays the minimum tax imposed by the Act as opposed to the maximum. A general anti avoidance rule (GAAR) is a set of broad and general principles-based rules enacted in the tax code aimed at counteracting such avoidance of tax.
GAAR has been introduced in India due to Vodafone case ruling in favor of the company by the Supreme Court of India. The court had held on 20 January 2012 that the Income Tax department did not have the jurisdiction to levy Rs 11,000 crore tax on the offshore transaction between Vodafone International Holdings and Hutchison Group. Supreme Court decision was followed by the government proposal, also known as GAAR, in the Union Budget 2012-13 providing for a “clarificatory retrospective amendment” in the Income Tax Act, with effect from 1962, to “restate the legislative intent” that overseas deals which derive their value substantially from domestic assets can be taxed.
Under the GAAR provisions, the Tax Commissioner is empowered to declare an arrangement as an impermissible avoidance arrangement (IAA) if
•The whole, a step or a part of the arrangement has been entered with the objective of obtaining tax benefit, and
1)Creates rights and obligations not normally created in arm’s length transactions, or
2)Results in direct or indirect misuse or abuse of the provisions of the code, or
3)Lacks commercial substance in whole or part, or is not bonafide
Indian Government is trying to give powers to income tax authorities as implementation of GAAR provides tremendous powers to deny tax benefit to an entity if a transaction has been carried with the sole intention of tax avoidance. Due to powers in the hand of taxmen, now innocents may be harassed by them.
Moreover, the Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) money coming to India through Mauritius route will become taxable. While in the worst case scenario, onus lies on the assesse to prove that there is no tax benefit and the transaction is not an avoidance transaction.
GAAR can be invoked as an alternative to or in addition to any other basis of making an assessment. It is applicable even if the main / overall purpose of the arrangement is not to obtain a tax benefit and only if a step / part of the arrangement is to obtain a benefit.
It is also criticized for its ambiguous language, the lack of details, and the sudden onset of the provisions that among the factors that have upset foreign investors.
However, on 25 June 2012, former Union Finance Minister Pranab Mukherjee proposed to defer the rollout of GAAR by a year to the financial year that begins in April 2013 to "provide more time" to both taxpayers and the tax office to address all related issues.
Moreover, in the light of above criticisms, he proposed some measures like-
•To remove the onus of proof entirely from the taxpayer and shift it to the revenue departments
•An independent member would be in the GAAR approving panel, while one member would be an officer of the level of Joint Secretary, or above, from the Ministry of Law
•On the proposed retrospective amendment in tax rules, the changes will not override the provisions of double-tax avoidance treaties India has with 82 countries. The retroactive changes will only impact those cases where a deal has been routed through low-tax and no-tax countries with whom India does not have tax treaties.
•The proposed retrospective changes in tax rules will not be used to reopen cases where assessment orders have already been finalized
•Non-resident investors of FIIs will be exempt from the rules, and there will be a monetary threshold from which GAAR will be implemented
•According to the draft, GAAR will come into effect from April 1 2013. According to the guidelines, FII not opting for treaty benefits and ready to pay taxes will not come under GAAR, but those who do opt for dual taxation avoidance agreements will come under its purview.
However, the rules of GAAR will be finalized after 20 July 2012 after seeking comments for other stakeholders. Ambiguities related to GAAR are needed to be resolved as soon as possible as it is likely to effect the FDI and FII which economy needs most at currently to upgrade its ratings.
There is nothing wrong in a legislation which is aimed to curb the tax avoidance but such legislations must be designed to curb the tax avoidance only and not on strengthening the red tapism.