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GENERAL ANTI-AVOIDANCE RULES (GAAR)

GENERAL ANTI-AVOIDANCE RULES (GAAR)

GAAR is incorporated in Direct Tax Code as a very important provision of direct tax policy.

Objective of GAAR:

  • Its objective is to prevent misuse and abuse of tax policy and counter aggressive tax avoidance schemes while ensuring that it is used only in appropriate cases by enabling a review of GAAR.
  • It aims at preventing deals and incomes that are structured only to avoid paying tax. The global practice on anti-avoidance rules is that most countries have codified “substance over form” doctrine in the form of GAAR.
  • As many as 30 countries have such rules, including many of the G-20 countries. There are also retrospective tax provisions in these rules in many countries.
  • GAAR has generated a serious debate in India not only due to its retro tax provisions but also for having created uncertainty in tax policy.                GENERAL ANTI-AVOIDANCE RULES (GAAR)

These rules along with DTC were referred to a Parliamentary Standing Committee in March, 2012 which observed as follows:

  1. GAAR gives arbitrary powers to taxmen to challenge complex deals. Such powers are prone to misuse.
  2. Onus lies on the taxpayer to prove that a transaction is genuine.
  3. The paper cannot seek an advance ruling on whether a transaction would be covered by GAAR.
  4. It has created uncertainty and ambiguity among investors.

The Standing Committee has recommended following amendments:

  1. removing discretionary powers of taxmen;
  2. evolving proper guidelines;
  3. having a threshold above which tax should be imposed; and
  4. taxpayer should enjoy the option of advance ruling.            GENERAL ANTI-AVOIDANCE RULES (GAAR)

Based on these recommendations, a review of GAAR is being carried out on the following lines:

  •  fixing a monetary threshold;
  • to lie with the tax authorities;
  • laying down appropriate guidelines;
  • orders of the Commissioner involving GAAR should be subject to approval of Dispute Resolution Panel which would be a collegium of three Commissioners of Income tax;
  • provision for advance ruling;
  • there should be a time limit within which Commissioner will have to decide whether to impose GAAR or not;
  • an appropriate panel will have to decide on GAAR cases;
  • retro tax provisions shall apply;
  • short term capital gains made in investments through shell entities like tax heavens shall be subjected to tax;
  • investments in the nature of round tripping shall attract GAAR; and
  • P-Notes shall not be subjected to GAAR.                  GENERAL ANTI-AVOIDANCE RULES (GAAR)

The Government set up Parathasarthy Shome Committee to review GAAR.

The Committee gave its report in September 2012 recommending as follows:

  • GAAR should be deferred till 2016-17.
  • GAAR should not have retrospective effect and should apply only to taxes of more than Rs. 3 crore.
  • GAAR should not be imposed for Singapore and Mauritius.
  • There should be no short-term Capital gains tax on investments in stock markets including those on FlIs and non-residents.                      GENERAL ANTI-AVOIDANCE RULES (GAAR)
  • Government should specify illustrative negative list for tax mitigation,
  • GAAR should not be imposed on intra-group transactions.
  • Grandfather all existing investments involving a question of taxation of overseas entities.
  • Rate of STT should be raised to make up for loss in not imposing Capital gains tax.

A bill to implement Direct Tax Code has been pending in the Lok Sabha since August 2011.

In a bid to allay tax concerns of MNCs regarding offshore transactions of their Indian assets, the government set up a four-member committee in -gust 2014 to decide retrospective tax cases. The committee consists of CBDT officials.

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