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. [Click Here to read the difference between Tax Evasion",
"Tax Avoidnace" , "Tax Mitigation, Tax Planning].
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 (Chronology of GAAR controversy
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
(g) On 27th September, 2013, GoI issued
notification and as per this notification GAAR would be applicable
to only to foreign institutional investors that have not taken the benefit of
an agreement under Section 90 or Section 90A of the I-T Act or Double Taxation
Avoidance Agreement (DTAA). Thus now (a) investments made by
foreign investors prior to August 2010 will not attract GAAR; ( b) GAAR
provisions that will come into effect from April 2016 and (c) apply only
to business arrangements with a tax benefit exceeding Rs3 crores.
Some other rules notified includes : "Where a
part of an arrangement is declared to be an impermissible avoidance
arrangement, the consequences in relation to tax shall be determined with
reference to such part only," Before invoking the GAAR
provisions, tax officials would have to be "issue a notice in writing to
the assessee seeking objections, if any, to its applicability".
However, this notification has been criticised as according to this notification the investments made prior to 30th August, 2010 will be certainly out of GAAR scrutiny, but the rules place other arrangements under the scrutiny of GAAR. Therefore, experts are not happy that the uncertainty relating to other aspects except investments still continues.
The grandfathering under the notification also appears to be merely a mirage, because only income from investments sold before August 2010 will be grandfathered. This means investments made prior to August 2010 but sold after GAAR becomes effective will be subject to GAAR. (For definition of Grandfathering see below)
However, this notification has been criticised as according to this notification the investments made prior to 30th August, 2010 will be certainly out of GAAR scrutiny, but the rules place other arrangements under the scrutiny of GAAR. Therefore, experts are not happy that the uncertainty relating to other aspects except investments still continues.
The grandfathering under the notification also appears to be merely a mirage, because only income from investments sold before August 2010 will be grandfathered. This means investments made prior to August 2010 but sold after GAAR becomes effective will be subject to GAAR. (For definition of Grandfathering see below)
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.
Click Here for some of the Latest News About GAAR :
(C) 14th January, 2013 : GAAR Deferred by 2 years (14th January, 2013)
(D) 27th September 2013 : News For GAAR Government notifies implementation of GAAR from April 2016 (27th
Septembr, 2013)
What is Grandfather clause :
Grandfather clause is a situation in which an old rule
continues to apply to some existing situations, while a new rule will apply to
all future situations. Frequently, the exemption is limited; it may extend for
a set period of time, or it may be lost under certain
circumstances. An exemption that allows persons or entities to
continue with an activity they were engaging in before but the same activity is
not allowed to new entities. For example, a car manufacturer is allowed to
produce cars with certain environment norms, but new entities are required to
fullfil strictly norms.
