Analysis of GAAR Provisions and Recommendations of the Shome Committee

 Analysis of the GAAR provisions

4.1       The provisions relating to GAAR appear in Chapter X-A (sections 95 to 102) of the Act. The provisions allow the tax authority to, notwithstanding anything contained in
the  Act,  declare  an ‘arrangement’  which  the  assessee  has  entered  into,  as  an ‘impermissible avoidance arrangement’. Once an ‘arrangement’ has been declared as an ‘impermissible avoidance arrangement’, the consequence as regards the tax liability would also be determined.

4.2       The provisions give a wide definition of the term ‘arrangement’. An ‘arrangement’  means any step in or a part or whole of any transaction, operation, scheme, agreement or understanding, whether enforceable or not.    It also includes the alienation of any property  in  such  a  transaction  etc.     The  onus  of  proving  that  there  is  an impermissible avoidance arrangement is on the Revenue.

4.3       An ‘arrangement’ would be an ‘impermissible avoidance arrangement’ if,

(a)       its main purpose is to obtain a ‘tax benefit’, and,

(b)       it also has one of the following characteristics:

(i)         it  creates  rights  and  obligations,  which  are  not  normally created

between parties dealing at arm’s length;

(ii)        it results in misuse or abuse of the provisions of the tax law;

(iii)       it lacks commercial substance;

(iv)       it is carried out by means or in a manner which is normally not

employed for an authentic (bona fide) purpose.

A ‘tax benefit’ has been defined to mean

(i)         a reduction or avoidance or deferral of tax or other amount payable under

the Act or as a result of a tax treaty;

(ii)        an  increase in a refund of tax or other amount that would be payable

under the Act or as a result of tax treaty; or

(iii)       a reduction in total income including an increase in loss.

The term “tax benefit” would be the benefit, quantified in terms of tax liability, arising to any party to the arrangement on account of such arrangement.

4.4       The onus of proving that

(A)       there is an arrangement,

(B)       the arrangement leads to a ‘tax benefit’,

(C)       the main purpose or one of the main purposes of the ‘arrangement’

is to obtain a ‘tax benefit’, and

(D)       the arrangement has one of the characteristics listed at (i) to (iv) at

(b) of 4.3 above

is on the revenue.