Introduction of General Anti-Avoidance Rule In India

We all know that taxes collected from individuals, businesses, and other entities account for the majority of the government’s revenue. Everyone wants to reap the benefits of the tax that has been levied on them. The Indian government implemented the General Anti-Avoidance Rule (GAAR) to combat tax evasion and leakage. After the well-known case of Vodafone International, the Indian government enacted the GAAR provision.

What Is GAAR?

The General Anti-Avoidance Rule (GAAR) is a tax avoidance law that was enacted to maintain a check on corporations who entered into a tax avoidance arrangement. The concept of GAAR is covered in Chapter X-A of India’s Income Tax Act, 1961. GAAR was first proposed by then-Finance Minister Pranab Mukherjee during the 2012 budget session. The government of India has the authority to charge and collect taxes from the people of India under Article 265 of the Indian Constitution. Every citizen is presumed to be obligated to pay a reasonable tax under the terms of tax statutes. Under Indian law, a person who avoids paying taxes is considered to be evading taxes.

Tax avoidance is the practice of organisations attempting to reduce their tax liability to the government. The General Anti-avoidance Rule in India was enacted by the Finance Act of 2012 with the goal of making any tax planning or agreement, whether done directly or indirectly, illegal and punishable under the provisions of the legislation. Tax avoidance, according to Black Law’s dictionary, is the reduction of one’s tax liability by utilising legally accessible tax planning opportunities.

How does GAAR work?

The General Anti-avoidance Rule in India is founded on the idea of substance over form, which states that when parties enter into an agreement to determine the tax consequences, the genuine intention of the parties is perceived, regardless of the legal framework of the transaction or agreement. The following are four tests to take:

1. The agreement establishes obligations and rights that are not mutually exclusive.
2. An arrangement or transaction resulting in the misuse or abuse of a tax law provision.
3. It is devoid of commercial value.
4. The transaction was not done in a legitimate way.

If the tax authority believes that the main purpose of the arrangement or transaction is to avoid paying taxes and profit from it, and even if only one of the four conditions is met, the tax authority has the power to declare the transaction illegal and characterise it in such a way that it maximises tax revenue.

Tax Evasion, Tax Avoidance & Tax Mitigation

Tax mitigation

It is a ‘positive’ term used to describe a situation in which taxpayers take advantage of a fiscal incentive provided by tax legislation by adhering to its terms and understanding the economic consequences of their actions. Under the Act, tax mitigation is permitted. Even when GAAR takes effect, this tax reduction is reasonable.

Tax evasion 

This occurs when a person or company fails to pay the government the taxes that are due. This is prohibited and may result in legal action. Tax evasion includes illegality, deliberate suppression of information, misrepresentation, and fraud, all of which are illegal under the law. The General Anti-avoidance Rule does not encompass this because existing jurisprudence already covers tax evasion transactions.

Tax avoidance 

This term refers to measures made by a taxpayer that are not illegal or prohibited by law. Despite the fact that they are not forbidden by law, they are deemed undesirable and inequitable since they undercut the goal of successful tax collection. The General Anti-avoidance Rule is particularly hostile to transactions whose main purpose is to avoid paying taxes. GAAR is being proposed to cover this type of tax avoidance technique.

Impermissible Avoidance Arrangement (IAA)

The Impermissible Avoidance Arrangement (IAA) is the most important test for the General Anti-avoidance Rule to apply. To be considered an IAA, two conditions must be met at the same time.

1. The first is that there is a tax advantage.
2. Secondly, when one of the following four scenarios occurs:

• Generation of rights or duties that are not normally generated between people who are not dealing with each other at arm’s length
• Resultant abuse or wrong application of this act’s provisions, either directly or indirectly
• In whole or in part, lacking or destined to lack commercial substance under section 97
• Is entered into or carried out using or in a way that is not customarily used for legitimate objectives.

How is GAAR invoked?

1. To begin with, the assessing officer refers a matter to the tax commissioner that may be a prospective GAAR issue.

2. The tax commissioner provides a notification to the taxpayer after verifying that the arrangement is an Impermissible Avoidance Arrangement (IAA) after making the reference.

3. If the taxpayer is required to declare that their arrangement is not IAA, they must provide the document.

4. If the tax commissioner is not pleased with the response after it is filed, the case is referred to the authorising panel.

5. The approving panel considers all aspects of the case before issuing direct instructions to the taxpayers and tax authorities.

6. Finally, the assessing officer gives the taxpayer an order.

Conclusion

Collecting taxes from businesses is critical for the government since this money is used to implement new policies that benefit society in a variety of ways, such as building roads, highways, and bridges. The government created the General Anti-avoidance Rule in order to collect taxes from corporations that make deliberate arrangements to avoid paying taxes.

It is beneficial to the country, but there are some flaws that the government must address. Many businesses are concerned that they would be harassed by tax officials as a result of GAAR, even if they are honest taxpayers. This is what must be altered.