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General Anti Avoidance Rules (GAAR), India – Meaning and Implications

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GAAR or General Anti Avoidance Rules is a concept which generally empowers the Revenue Authorities in a country to deny the tax benefits of transactions or arrangements 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 cannot be avoided by such transactions.

  • Australia introduced such rules way back in 1981
  • Countries like Germany, France, Canada, New Zealand, South Africa etc too opted for GAAR
  • USA and UK have adopted a cautious approach and have not been aggressive in this regard.

Thus 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 cannot be predicted and thus cannot be provided at the time when it is legislated.

Read about Finance Budget 2013.

GAAR in India

In India, GAAR caught the limelight with the release of draft Direct Taxes Code Bill (popularly known as DTC 2009) on 12th August 2009. The bill contained the provisions for GAAR which was later revised and released as discussion paper in June 2010. Followed by tabling in parliament on 30th August, 2010, a formal Bill to enact the law known as the Direct Taxes Code 2010 was passed and it was made applicable from 1st April, 2012.

Post announcement regarding the implementation of GAAR, negative pressures from various groups was imposed on the government and as a result GAAR was postponed to 2013, and was likely to be introduced along with the DTC from 1st April 2013.

In July 2012 an expert committee was set to review the GAAR policies. The latest report of the committee indicates further delay in implementation of GAAR by a period of 3 years (2016-17).

Implications of GAAR

The implementation of GAAR would empower the official to deny the tax benefits. Those transactions which doesn’t have any commercial substance or have the purpose of saving tax would not be liable for any tax benefit. Also GAAR has a provision of allowing the government to retroactively tax overseas deals. Vodafone could be one of the classic example of investment in local assets and overseas deal which would be taxed by the government.

Will P-Notes be targeted?

P notes or the participatory notes are the investment instrument which will see a slowdown in the usage after the implementation of GAAR. Tax imposition on the registered financial firms indulging themselves into buying the financial instrument would be seen rising. Also the rising taxation would result in passing the same as brokerage to the end investor. After the implementation to GAAR, in order to avoid the rising tax payment, investment needs to prove the usage of P-note which should have commercial substance instead of the tax saving purpose.

What happens to the Mauritius route?

Implementation of GAAR would give powers to the tax department so that they can deny double taxation treaty benefits to foreign funds based out of tax-havens like Mauritius. Overseas portfolio investors, who route their investments from countries like Mauritius, currently do not pay any tax on short-term capital gains which will be almost abolished.

Recent developments regarding GAAR

  1. Finance Minister, Pranab Mukherjee on 16th March, 2012 takes a tough stand only to announce that the government will crack down on tax avoidance effective from fiscal year 2012-13
  2. Mr. Mukherjee was asked to take back the words and was asked to defer the implementation of GAAR by a year as his announcements spooked overseas investors. The move came on 7th May, 2012
  3. On 28th June, 2012 the Finance Ministry releases first draft on GAAR; there is wide criticism of the provisions
  4. A review committee was formed by PM Manmohan Singh on 14th July, 2012. The committee was headed under the leadership of Parthasarathi Shome and was asked to prepare a second draft along with final guidelines on GAAR
  5. Recommending some of the more investor friendly measures, Shome Committee recommends deferring GAAR by three years on 1st September, 2012
  6. A month later on 1st October 2012, the Finance Ministry announced about the release of final guidelines for GAAR by the end of the same month
  7. November 2012, Finance Ministry announced about the final amendments made on the GAAR policy

General Anti Avoidance Rules in India is indeed a commendable step taken by the Indian Government to control Money Laundering and curb Black Money flow. However, it is yet to be seen when the Government comes out with a definite timeline and plan to implement it in our country.



Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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