General Anti Avoidance Rules (GAAR) Explained
General Anti Avoidance Rules (GAAR) has been introduced to overcome the problem of Tax Avoidance. It is intended to target tax evaders like Indian companies and investors trying to route investments through tax havens in order to avoid taxes. In past, many developed countries have implemented GAAR. The Prime Minister constituted an Expert Committee (EC) on GAAR on 17 July 2012, under the chairmanship of Dr. Parthasarathi Shome, to vet and rework the Guidelines based on comments from various stakeholders and the general public.
Tax Mitigation, Tax Avoidance and Tax Evasion
- Tax Mitigation: A situation where the taxpayer uses a fiscal incentive available to it in the tax legislation to reduce its tax liability.
- Tax Avoidance: Tax Avoidance is the set of measures taken by taxpayer by using the legitimate ways defined in tax legislation to reduce tax liability. The taxpayer reduces his liability to tax without involving him in the loss or expenditure which entitles him to that reduction thus it is a case of impermissible tax avoidance.
- Tax Evasion: Tax Evasion is the illegal practice of not paying the due taxes by not reporting the income or by reporting exemption which are illegal. It includes wilful suppression of facts, misinterpretation and fraud.
GAAR provisions are applicable to Tax avoidance only and not on Tax Mitigation and Evasion.
A minimum threshold limit of a tax benefit of Rs3 crore before GAAR is applicable
General Anti Avoidance Rules (GAAR) Applicability Date
It has been made effective from 1 April 2017 in Indian tax law.
Timeline of Events related to GAAR in India
- General Anti Avoidance Rules (GAAR) was introduced in the Finance Bill 2012 (with effect from 1 April 2012).
- GAAR was deferred till 1 April 2014 on enactment of the Finance Bill 2012
- Draft GAAR guidelines were released by the Government of India.
- An expert committee was constituted to review and rework GAAR guidelines
- The Committee’s report was published
- GAAR was postponed for another two years and was to become applicable from 1 April 2016.
- Implementation of the Finance Bill 2015 deferred GAAR for one year. It has been applicable from 1 April 2017
Impermissible Avoidance Agreement (IAA)
IAA applies to only those transactions where “the main purpose” is to obtain a tax benefit in addition to satisfaction of at least one of the four tainted elements tests:
- Creation of rights or obligations (not ordinarily implemented) between persons dealing at arm’s length
- Results, directly or indirectly, in misuse or abuse of the provisions of the Act
- Lacks commercial substance or is deemed to be deficient in commercial substance in whole or in part
- Is entered or carried out in a manner not ordinarily employed for bona fide purposes
GAAR is triggered only if there is an Impermissible avoidance arrangement (IAA).
How to Invoke GAAR
- The Tax Officer may examine arrangements for an IAA inquiry
- The Tax Officer could refer the arrangement to the Principal Commissioner or Commissioner of Income Tax for him or her to declare it as an IAA, if he or she considers such reference necessary
- If the Commissioner of Income Tax is of the opinion that GAAR is to be invoked, he or she will issue a show cause notice to the taxpayer
- The taxpayer is to furnish his or her objections within the period mandated in the notice (this period not exceeding 60 days).
- If satisfied that the arrangement is an IAA, the Commissioner of Income Tax will make a reference to the Approving Panel
- If satisfied that GAAR need not be invoked, the CIT will pass an order favournig the taxpayer.
- The Panel will provide the taxpayer the opportunity to be heard.
- No invocation of GAAR is required if the Approving Panel is satisfied with the explanation or submission provided by the taxpayer
- If it is not satisfied, the Approving Panel will issue directions declaring an arrangement an IAA
- Directions will be passed within six months from the end of the month on which the reference was received from the Commissioner
Redressal of Grievance
A taxpayer has the right to appeal to the Income Tax Appellate Tribunal (ITAT) against an order passed by the Revenue along with the direction of the Approving Panel. A subsequent appeal may be filed before a High Court and the Supreme Court
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