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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
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.
GAAR 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
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:
Facts:
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
?
Interpretation:
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:
Facts:
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 ?
Interpretation:
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.
