Taxation / Taxation / General Anti Avoidance Rules (GAAR).
General Anti Avoidance Rules (GAAR).
- Background:
- Some firms and individuals engage in practices to minimize or completely avoid tax payments, exploiting legal frameworks. Instances like the Vodafone-Hutch deal, where tax avoidance through offshore agreements raised concerns, prompted the government to address such practices.
- Doctrine of "Look Through" vs. "Look At":
- In cases like Vodafone, the government applied the doctrine of "look through" instead of "look at." This meant examining the substance of the transaction rather than its legal form. The government deemed the tax avoidance to be tax evasion, leading to a demand for clear rules.
- Introduction of GAAR:
- In response to the need for clarity and anti-tax avoidance measures, the Government of India introduced General Anti Avoidance Rules (GAAR). These rules were framed by the Department of Revenue under the Ministry of Finance.
- Operationalization and Objectives:
- GAAR became operational on April 1, 2017, with the primary objective of preventing tax evasion disguised as tax planning.
- Key Provisions of GAAR:
- Grandfathering Provision:
- Investments made until March 31, 2017, were not subjected to GAAR, providing a transition period.
- Threshold for Applicability:
- GAAR is applicable to those claiming tax benefits of over Rs 3 crore.
- Vetting Process:
- The application of GAAR undergoes a two-stage vetting process:
- First, it is vetted by the Principal Commissioner/Commissioner of Income Tax.
- Second, an Approving Panel, headed by a high court judge, reviews the proposal.
- Procedural Safeguards:
- Adequate procedural safeguards are in place to ensure that GAAR is invoked uniformly, fairly, and rationally.
- Objectives and Impact:
- The rules are designed to enhance transparency in tax matters and curb tax evasion by preventing transactions lacking a genuine commercial purpose other than tax avoidance.
GAAR serves as a tool to deter and penalize artificial arrangements aimed solely at tax evasion, contributing to the overall integrity of the tax system.
