General Anti-Avoidance Rule (GAAR)

Introduction

• It is a provision under direct tax law that seeks to check tax avoidance i.e. misuse of exemption, ambiguous language, loopholes in tax laws etc. 
• It is a provision in direct tax legislation that aims to prevent tax evasions, such as the misuse of exemptions, unclear language, and tax law loopholes. 
•  A transaction that disguises the value, location, source, ownership or control of funds would also be deemed to lack commercial substance. y It gives tax officers the authority to disregard certain rules of domestic tax law and the Double Taxation Avoidance Agreement (DTAA) (a bilateral agreement). 
• The goal of GAAR is to formalise 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. 
• India’s general anti-avoidance rule (GAAR) came into effect on 1 April 2017 for the assessment year 2018-19.

Advantages of GAAR

• GAAR was brought in to address the tax avoidance issues and ensure that those in different tax brackets are taxed correctly. 
•  In many cases of tax avoidance, arrangements could take place for gaining a tax advantage while complying with the law. 
• GAAR helps to check tax avoidance.
• It would plug loopholes in the taxation system.
•  It would also check misuse of DTAA. 

Disadvantages of GAAR 

• It may increase the scope of corruption as it provides discretionary power to tax officials. 
• It may adversely affect domestic and foreign investment as it creates uncertainty regarding the interpretation of tax provisions