General Anti Avoidance Rule (GAAR)

GAAR is an anti-tax avoidance law in India that aims to prevent tax evasion and leakage. It went into effect on April 1st, 2017 and the Income Tax Act, 1961 contains the GAAR provisions. The need for a GAAR is typically supported by a worry that the tax system’s integrity has to be enhanced. GAAR is a method for detecting aggressive tax planning, particularly transactions or company arrangements made to avoid taxes. It was introduced in India as a result of the Supreme Court’s decision in favor of VODAFONE. It aims to reduce revenue losses to the government as a result of checking aggressive tax planning tactics used by businesses.

What is the General Anti Avoidance Rule (GAAR)?

GAAR is a concept that allows the Revenue Authority of a country to deny tax benefits to transactions or arrangements that have no business substance and are only to obtain a tax benefit. The Rule is aimed at cutting revenue losses that happen to the government. A tax avoidance law was enacted to maintain checking aggressive tax planning who entered into a tax avoidance arrangement. The notion of GAAR is covered in India’s Income Tax Act, 1961, Chapter X-A. During the 2012 budget session, then-Finance Minister Pranab Mukherjee proposed GAAR for the first time. Article 265 of the Indian Constitution empowers the government to levy and collect taxes from the Indian people.

Under the wording of tax statutes, every citizen is deemed to be obligated to pay a reasonable tax. From assessment year 208-19, GAAR is in effect. Tax evasion is defined in Indian law as a person who avoids paying taxes.

GAAR was enacted by the Finance Act of 2012 to cut revenue losses that happen to the government. It was formulated with the goal of checking aggressive tax planning or agreement, whether done directly or indirectly, is illegal and punishable under the provisions of the legislation.According to Black Law’s dictionary, tax avoidance is the reduction of one’s tax liability by utilizing legally accessible tax planning alternatives.

Why was GAAR introduced in India?

Many countries have specific anti-tax avoidance laws to cut revenue losses. Tax avoidance is the practice of organizations attempting to reduce their tax liability to the government. As per the provisions of India’s Income Tax Act, 1961, the General Anti-Avoidance Rules were introduced in India after the Vodafone deal with Hutchison-Essar. One of the key reasons for establishing GAAR is the Vodafone case, which has become the largest sensation in Indian taxation history. This transaction occurred in the Cayman Islands. The government claims that roughly USD 2 billion in taxes was lost. In the subsequent case, the Supreme Court ruled in favor of Vodafone. GAAR has finally taken effect as of April 1, 2017.

Where does GAAR Applies?

GAAR would apply to an arrangement entered into by a taxpayer that could be ruled an impermissible avoidance agreement under the Income Tax Act. The non-obstante clause is the first part of this clause. Because of this, it can be used in a variety of applications.

The goal of GAAR is to formalize the idea of ‘substance over form,’ in which the true intention of the parties and the purpose of an arrangement are considered in assessing the tax consequences, regardless of the legal structure of the transaction or arrangement in question. As a result, GAAR provisions apply to Impermissible avoidance arrangements (IAA), which must meet the following two conditions:

1. The primary goal of such an agreement is to receive a tax benefit

2. If the arrangement:

• Creates rights or duties between people who aren’t normally negotiating at arm’s length (or)

• This results in the misuse or abuse of the provisions of the Income Tax Act, 1961, either directly or indirectly (or)

• In whole or in part, lacks or is regarded to lack commercial substance (or)

• It is entered or carried out in a way not normally used for a legitimate purpose.

What is the mechanism of GAAR?

GAAR is looking for checking aggressive tax planning. It is founded on the idea of substance over form, which states that when parties enter into an agreement to determine the tax consequences, regardless of the formal framework of the transaction or agreement, the parties’ true intent is discerned.

Below are the results of four tests

•  The agreement provides obligations and rights that are not mutually exclusive.

•  The arrangement or transaction results in the misuse or abuse of a tax law provision.

•  It isn’t commercially viable.

•  The transaction was not completed legitimately.

Conclusion

With the provisions of the Income Tax Act, 1961, almost any event that has the potential to result in a tax decrease can be covered by GAAR. As a result, before engaging in any transaction, one must carefully consider the tax implications. Furthermore, GAAR has received much criticism since anti-tax avoidance legislation is difficult to apply because it is difficult to distinguish between different types of avoidance tactics. Various thinkers have challenged many provisions of GAAR to cut revenue losses that happen to the government. However, the most common criticism of GAAR provisions is that they are perceived to be excessively corrective, and there was concern that tax officials would use these rules frequently, torturing the average honest taxpayer.