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The General Anti-avoidance Rule (GAAR) is a concept that allows a country’s Revenue Authority to deny tax benefits to transactions or arrangements that have no business substance and are solely for the purpose of obtaining a tax benefit. The need for a GAAR is frequently explained by a concern that the tax system’s integrity needs to be improved.
The terms “tax evasion,” “tax avoidance,” and “tax mitigation” are all used interchangeably. Tax mitigation 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 reduction is permitted. Even when GAAR takes effect, this tax cut is reasonable.
In the following paragraphs, we’ll look at when GAAR can be used and when it can’t.
Major Features Of GAAR
In order to understand the basics of the General Anti-Avoidance Rule, we need to understand its principal features. The following are some of the important recommendations that have been incorporated into the rules:
- For GAAR provisions to apply, a threshold of Rs. 3 crores in tax benefits must be breached.
- Foreign Institutional Investors (FII) are exempted from the GAAR if specific conditions are met.
- When a portion of an arrangement is declared to be an illegal tax avoidance scheme, the tax penalties are assessed solely on the basis of that portion.
- Investments made before April 1, 2010, when the Direct Taxes Code Bill 2010 was introduced, will be grandfathered (from GAAR). A grandfathering clause refers to a circumstance in which an old rule applies to some current situations while a new rule applies to all future situations. According to the CBDT’s latest GAAR notification, investments made before April 1, 2017, will be grandfathered.
Main Purpose of General Anti-Avoidance Rules that cannot be Avoided
In the event of “Impermissible Avoidance Arrangements,” the General Anti-Avoidance Rule would be activated (IAA). An impermissible avoidance arrangement is one whose primary goal is to seek a tax advantage. Tax evasion, according to GAAR, is the deliberate non-payment of taxes through fraud, non-declaration, or misrepresentation and is a felony punishable by a fine or jail, whereas tax avoidance is the reduction of taxes using legal ways. Acceptable avoidance is separated from unacceptable or unlawful avoidance (sometimes known as “tax mitigation”).
Consequences of General Anti-Avoidance Rules
When a transaction is brought under the IAA’s jurisdiction, it might have far-reaching consequences. With IAA in place, the effects of a tax arrangement, such as the avoidance of tax advantage or the benefit of a tax treaty, must be determined in a way that is judged suitable under the law.
The act defines the intended outcomes in such instances, which include rejecting, merging, or recharacterizing any step or the entire IAA.
To this purpose, the act states that (i) any equity may be classified as debt or vice versa; (ii) any capital accrual or receipt may be considered as revenue or vice versa; or (iii) any deduction, expenditure, rebate, or relief may be recharacterized. In addition, the act establishes sanctions for related persons and accommodating parties. In other words, once a transaction is designated as an IAA, the underlying tax benefit is subject to taxation regardless of the transaction’s legal form or the parties’ positions.
New GAAR Notifications
After learning the basics of the General Anti-Avoidance Rule, it is extremely essential to acquaint yourself with the new GAAR notifications. GAAR examines the application of taxes on transactions or arrangements whose principal goal is to obtain a tax benefit, or transactions that are not commercially viable. GAAR will be called if there is no other good business motivation (arm’s length principle, bona fide transaction, business expansion, etc.) other than tax avoidance. GAAR would only apply to foreign investors who have not taken advantage of Double Taxation Avoidance Agreements (DTAA).
Problems in General Anti-Avoidance Rule You Should Know
The basics of the General Anti-Avoidance Rule define GAAR as an unusual piece of tax legislation in that it makes tax avoidance more visible to tax officials. Anti-avoidance legislation is difficult to apply because different types of avoidance techniques are difficult to distinguish. The border between undesirable avoidance and permissible avoidance is razor-thin. It is quite difficult to distinguish between a lawful and an impermissible arrangement under certain situations. The goal of the General Anti-Avoidance Rule should be to target arrangements that have the single or primary objective of obtaining a tax benefit.
Conclusion
GAAR is an exceptional piece of legislation in that it vests discretionary authority in tax administrators. However, the implication of the General Anti-Evasion Rules in the tax code shows the legislature’s resistance to tax avoidance manoeuvres on a bigger scale.
In a broader sense, the legislature is attempting to end the ongoing conflict between the taxpayer and the tax officer through GAAR. It proposes meaningful specifications against which the taxpayer’s conduct will be judged, as well as a procedure to maintain the integrity of dispute resolution and instil equality in the framework.
Because of GAAR, the tax authority now has unrestricted ability to question any transaction or arrangement. The assessee bears the burden of evidence in demonstrating that the arrangement does not fall within the scope of an Impermissible Avoidance Arrangement (IAA), which can be time-consuming but also provides opportunities for taxpayers to understand the basics of the General Anti-Avoidance Rules.
