General Anti Avoidance Rules
The GAAR (General Anti-Avoidance Rules), originally proposed in the Direct Taxes Code 2010, are targeted at arrangements or transactions made specifically to avoid taxes. The government had decided to advance the introduction of GAAR and implement it from the financial year 2013–14 itself. More than 30 countries have introduced GAAR provisions in their respective tax codes to check such tax evasion.
The objective of the GAAR provisions is to codify the doctrine of ‘substance over form’ where the real intention of the parties and purpose of an arrangement is taken into account for determining the tax consequences, irrespective of the legal structure of the concerned transaction or arrangement. It essentially comes into effect where an arrangement is entered into with the main the purpose or one of the main purposes of obtaining a tax benefit and which also satisfies at least one of the following four tests:
(i) The arrangement creates rights and obligations that are not at arm’s length,
(ii) it results in misuse or abuse of provisions of tax laws,
(iii) lacks commercial substance or is deemed to lack commercial substance, or
(iv) it is not carried out in a bona fide manner.
Thus, if the tax officer believes that the main purpose or one of the main purposes of an
(i) It is presumed that obtaining
(ii) An arrangement will be deemed to lack the commercial substance under GAAR if it involves the location of an asset or of a transaction or of the place of residence of any party that would not have been so located for any substantial commercial purpose other than obtaining the tax benefit. This again is an amazingly wide the provision that provides a great weapon in the armory of the tax authorities to challenge almost every inbound or outbound transaction with respect to India, made through any of the favorable tax treaties that India has entered into. The governments’ intention becomes clear visibly by one of the finance ministry replies to the Standing Committee on DTC, where it has made it clear that the GAAR provisions will check treaty shopping by the taxpayer for the avoidance of payment of tax in India.
(iii) GAAR allows tax authorities to call a business arrangement or a transaction ‘impermissible avoidance arrangement’ if they feel it has been primarily entered into to avoid taxes. Once an arrangement is ruled ‘impermissible’ then the tax authorities can deny tax benefits. Most aggressive tax avoidance arrangements would be under the risk of being termed impermissible. It has a provision according to which the onus to prove that an arrangement is ‘impermissible’ will lie with the tax department. The GAAR panel, the final body that will decide on the applicability of the law, will include an independent member. The rule can apply on domestic as well as overseas transactions.
(iv) GAAR is a very
As per the decision was taken last year, the Government in February 2017 announced to enforce the GAAR from the financial year 2017-All consultations with the stakeholders have been completed and the regulatory framework for it is expected to be announced by late March 2017.
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