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GAAR -  What is GAAR 

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Rajesh Goyal 




What is full form of GAAR ?  or What is GAAR ?


The full form of GAAR is : General Anti-Avoidance Rules


What is GAAR in simple terms ?


Tax Avoidance is an area of concern across the world.  The rules are framed in different countries to minimize such avoidance of tax.  Such rules in simple terms are known as  " General Anti Avoidance Rules "  or GAAR.   Thus GAAR is a set of general rules enacted so as to check the tax avoidance.



Why News for GAAR has been prominent in India in recent times ?


News for GAAR has been in prominence in last few years as Indian Government has taken initiative to introduce GAAR or General Anti Avoidance Rules with a view to increase tax collections.



Background for GAAR :


Lord Tomlin has well said "Every man is entitled to order his affairs so that tax attaching under the appropriate Acts is less than it otherwise would be" (IRC v Duke of Westminster).   People adopt various methods so that they can reduce their total tax liability.  


The methods adopted to reduce their tax liability can be broadly put into four categories : "Tax Evasion";  "Tax Avoidance",  "Tax Mitigation" and "Tax Planning".  The difference between these four methods some times becomes blurred  owing to the perception of the tax authorities and / or tax payer.     [Click Here to read the difference between Tax Evasion", "Tax Avoidnace" , "Tax Mitigation, Tax Planning].


GAAR refers to the second category i.e. tax avoidance.



What is Difference between GAAR and SAAR ?


Anti Avoidance Rules are broadly divided into two categories namely "General" and "Specific".   Thus, legislation dealing with "General" rules are termed as GAAR, whereas legislation dealing with "Speicifc  avoidnace are termed as "SAAR"


In India till recently SAAR was in vogue i.e. laws were amended to plug specific loopholes as and when they were noticed or were misused enmasse.  However, now Indian tax authorities wants to move towards GAAR but are facing severe opposition as tax payers fear that these will be misused by tax authorities by giving arbitrary and wide interpretations.  We can say SAAR being more specific provide certainty to taxpayers where as GAAR being general in nature can be misused and is subject to arbitrary interpretation by tax authorities.



GAAR Definition :


GAAR is a concept which generally empowers the Revenue Authorities in a country to deny the tax benefits of transactions or arrangments which do not have any commercial substance or consideration other than achieving the tax benefit.    Whenever revenue authorities question such transactions, there is a conflict with the tax payers.   Thus, different countries started making rules so that tax can not be avoided by such transactions.   Australia introduced such rules way back in 1981.  Later on countries like Germany, France, Canada, New  Zealand, South Africa etc too opted for GAAR.   However, countries like USA and UK have adopted a cautious approach and have not been aggressive in this regard.


Thus, in nutshell we can say that GAAR usually consists of a set of broad rules which are based on general principles to check the potential avoidance of the tax in general, in a form which can not be predicted and thus can not be provided at the time when it is legislated.


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GAAR in India  (Chronology of GAAR controversy in India)


In India, the real discussions on GAAR came to light with the release of draft Direct Taxes Code Bill (popularly known as DTC 2009) on 12th August 2009.  It contained the provisions for GAAR.  Later on the revised Discussion Paper was released in June 2010, followed by tabling in the Parliament on 30th August, 2010, a formal Bill to enact the law known as the DirectTaxes Code 2010.  The same was to be made applicable wef 1st April, 2012.   However, owing to negative publicity and pressures from various groups, GAAR was postponed to at least 2013, and was likely to be introduced alongwith the Direct Tax Code (DTC) from 1st April 2013.   Moreover, an Expert Committee has been set by Prime Minister (Manmohan Singh) in July 2012 to vet and rework the GAAR guidelines issued in June 2012.   The latest reports (September 2012) indicates, it may not be implemented even for 3 years i.e. this will be postponed for 3 years (2016-17).   Some of recent developments about GAAR are :-


    (a) 16th March, 2012 : Finance Minister, Pranab Mukherjee takes a tough stand and announces that the government will crack down on tax avoidance effective from fiscal year 2012-13

    (b) 7th May, 2012 : Finance Minister, Pranab Mukherjee forced to eat his words and agreed to defer GAAR by a year as his announcements spooked oversea investors

    (c) 28th June, 2012 : Finance Ministry releases first draft on GAAR;   There is wide criticism of the provisions.

    (d) 14th July, 2012 : PM, Manmohan Singh, forms review committee under Parthasarathi Shome, for preparing a second draft by 31st August and final guidelines by 30th September, 2012


    (e) 1st September, 2012 : Shome Committee recommends to defer GAAR by three years.   It also recommends some more investor friendly measures

    (f) 14th January, 2013 : GoI partially accepts the recommendations of Shome Committee and has decided to defer the same for 2 years and will now be effective from the year 2016-17


 (g) On 27th September, 2013, GoI issued notification and as per this notification  GAAR would be applicable to only to foreign institutional investors that have not taken the benefit of an agreement under Section 90 or Section 90A of the I-T Act or Double Taxation Avoidance Agreement (DTAA).  Thus now  (a) investments made by foreign investors prior to August 2010 will not attract GAAR; ( b) GAAR provisions that will come into effect from April 2016 and (c) apply only  to business arrangements with a tax benefit exceeding Rs3 crores.

Some other rules notified includes : "Where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax shall be determined with reference to such part only,"   Before invoking the GAAR provisions, tax officials would have to be "issue a notice in writing to the assessee seeking objections, if any, to its applicability".

However, this notification has been criticised as according to this notification the investments made prior to 30th August, 2010 will be certainly out of GAAR scrutiny, but the rules place other arrangements under the scrutiny of GAAR.  Therefore, experts are not happy that the uncertainty relating to other aspects except investments still continues.

The grandfathering under the notification also appears to be  merely a mirage, because only income from investments sold before August 2010 will be grandfathered.  This means investments made prior to  August 2010 but sold after GAAR becomes effective will be subject to GAAR.  (For definition of Grandfathering see below)



What was the Basic Criticism of GAAR ?  Why GAAR is dreaded ?


Many provisions of GAAR have been criticised by various people.   However, the basic criticism of GAAR provisions is that it is considered to be too sweeping in nature and there was a fear (considering poor record of IT authorities in India) that Assessing Officers will apply these provisions in a routine manner (or read misuse) and harass the general honest tax payer too.   There is only a fine distinction between Tax Avoidance and Tax Mitigation, as any arrangement to obtain a tax benefit can be considered as an impermissible avoidance arrangement by the assessing officer.   Thus, there was a hue and cry to put checks and balances in place to avoid arbitrary application of the provisions by the assessing authorities.   It was felt that there is a need for further legislative and administrative safeguards and at least a minimum threshold limit for invoking GAAR should be introduced so that small time tax payers are not harassed.


Two Examples to Understand GAAR provisions : (Source GAAR Committee)


Example 1:


A business sets up an undertaking in an under developed area by putting in substantial investment  of  capital,  carries  out  manufacturing  activities  therein  and  claims  a  tax deduction  on  sale  of  such  production/manufacturing.  Is  GAAR  applicable  in  such  a  case ?


There is an arrangement and one of the main purposes is a tax benefit. However, this is a case of tax mitigation where the tax payer is taking advantage of a fiscal incentive offered  to  him  by  submitting  to  the  conditions  and  economic  consequences  of  the provisions in the legislation e.g., setting up the business only in the under developed area. Revenue would not invoke GAAR as regards this arrangement.



Example 2:


A business sets up a factory for manufacturing in an under developed tax exempt area. It then diverts its production from other connected manufacturing units and shows the same as manufactured in the tax exempt unit (while doing only process of packaging there). Is GAAR applicable in such a case ?


There is an arrangement and there is a tax benefit, the main purpose or one of the main purposes  of  this  arrangement  is  to  obtain  a  tax  benefit.  The  transaction  lacks commercial substance and there is misuse of the tax provisions. Revenue would invoke GAAR as regards this arrangement.




Click Here to Read the details for this question i.e. Analysis of GAAR




Click Here for some of the Latest News About GAAR :


(A)1st October, 2012 : Final guidelines for GAAR by month-end (October, 2012), says Chidambaram


(B) 17th November, 2012: GAAR  Amendments  Finalized and waiting PMO approval : FM P. Chidambaram


(C) 14th January, 2013 : GAAR Deferred by 2 years (14th January, 2013)


(D) 27th September 2013 : News For GAAR Government notifies implementation of GAAR from April 2016 (27th Septembr, 2013)




What is Grandfather clause :


Grandfather clause is a situation in which an old rule continues to apply to some existing situations, while a new rule will apply to all future situations. Frequently, the exemption is limited; it may extend for a set period of time, or it may be lost under certain circumstances.   An exemption that allows persons or entities to continue with an activity they were engaging in before but the same activity is not allowed to new entities. For example, a car manufacturer is allowed to produce cars with certain environment norms, but new entities are required to fullfil strictly norms.  





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