General Anti Avoidance Rule (GAAR) | AIR Spotlight

GAAR is basically a set of rules designed to give Indian revenue authorities the right to scrutinise and tax, transactions which they believe are structured solely to avoid taxes. The rules would be applicable to all taxpayers.

GAAR | Background

  • It was originally proposed in Direct Tax Code of 2009 and was postponed for implementing it.
  • It will address those cases which are technically not illegal but those cases which are not ethical i.e. to say the cases which are concerned with ‘tax avoidance’ and not ‘tax evasion’.
  • General Anti Avoidance rule (GAAR) is a set of rules or a framework which helps the revenue authorities decides whether a particular transaction has commercial substance or not. 

GAAR | Concerns

  • GAAR gives more unilateral/arbitrary powers to the revenue authorities. Therefore, the industry is concerned about the ambit and the arbitrary interpretations the revenue authorities may have regarding the GAAR provisions.
  • Tax experts point out given the limited timeframe for taxpayers and tax authorities to understand the pending guidelines, it will be practical to defer the effective date for implementation by a reasonable period.
  • The guidelines should clarify that GAAR is a deterrent provision, and not a tax collection provision. It should be invoked only in cases of patently abusive, contrived and artificial arrangements.
  • Another issue faced by tax experts is that there are no specific penalty provisions in case GAAR provisions are invoked. Accordingly, tax authorities are likely to take recourse to two broad categories under normal penalty provisions – “under-reporting’’ (entailing 50 per cent penalty) and “mis-reporting” (entailing 200 per cent penalty).
  • It is critical to have guidelines laying down objective criteria for distinguishing cases of gross abuse from other cases, as well as clarifying the situations or circumstances and providing parameters for initiating and levy of penalty.
  • It is important to implement the provisions of GAAR in a way that they do not lead more litigation.
  • It will override tax treaty provisions and tax officials are allowed to deny tax benefits if a deal is found without any commercial purpose other than tax avoidance.

GAAR | Importance

  • It will allow the government to raise more revenue. It empowers the revenue authorities to generate more revenue from all those transactions which are not paying their taxes.
  • The objectives of any tax laws are to promote or incentivise real investments. It ensures that investments are maximised to the advantage of the national economy.
  • The entire GAAR activity would also the Government to meet its fiscal deficit target (under the FRBM Act) with the enhanced tax revenues for the government.
  • It creates a better business environment for the people to recognise that the state exists for the purpose of bringing genuine investments. This would recognise India as a serious country promoting free and fair trade practices rather than providing free tax advantages.

 GAAR | Conclusion

It will be implemented from 1st April, 2017 and the government has considered the minimum threshold where the GAAR provisions can be implemented. The genuineness of the transactions remains intact and only covers those transactions which have been taking an advantage of the loopholes present and the small tax players will not to be harassed.

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