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. These rules along with DTC were referred to a Parliamentary Standing Committee in March, 2012 which observed as follows:
- GAAR gives arbitrary powers to taxmen to challenge complex deals. Such powers are prone to misuse.
- Onus lies on the taxpayer to prove that a transaction is genuine.
- The paper cannot seek an advance ruling on whether a transaction would be covered by GAAR.
- It has created uncertainty and ambiguity among investors.
GAAR
The Standing Committee has recommended following amendments:
- removing discretionary powers of taxmen;
- evolving proper guidelines;
- having a threshold above which tax should be imposed; and
- taxpayer should enjoy the option of advance ruling.
Based on these recommendations, a review of GAAR is being carried out on the following lines:
(a) 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.
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.
- 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.
