Background of GAAR Provisions
The Indian tax laws got their first whiff of introduction of General Anti Avoidance Rules (‘GAAR’) in the proposed Direct Tax Code Bill released by the Government of India (‘GoI’). Subsequently, since the introduction of Direct Tax Code 2010 (‘DTC’) has been postponed, the GoI had proposed the introduction of GAAR provisions in the Finance Bill 2012. The manner and shape in which the GAAR provisions were proposed to be introduced in the Finance Bill 2012 met with widespread concerns. The same were partially mitigated by the GoI by deferring the applicability of GAAR provisions by one year and rationalizing certain onerous provisions.
Introduction of Draft Guidelines regarding implementation of GAAR
A Committee was earlier constituted to give recommendations for formulating guidelines for proper implementation of GAAR provisions under the DTC. With the subsequent introduction of GAAR in the Finance Act 2012, the Committee has now provided its recommendations regarding guidelines / circulars for implementation of GAAR provisions in light of the Finance Act 2012. The recommendations of the Committee would be codified by way of Circulars and Rules once the same are accepted by the GoI.
The proposed recommendations have been released in public domain with a view to garner participation from all concerned stakeholders. The Prime Minister’s Office has also issued a clarification that the recommendations of the Committee are open for consultation and feedback from stakeholders.
Explanation of GAAR
- The note for GAAR Guidelines provides that GAAR provisions seek to codify the doctrine of ‘substance over form’ in interpreting tax legislation.
- The GAAR provisions are not proposed to be applied in cases of tax evasion since the latter is even otherwise prohibited under the Indian Income Tax Act, 1961 (‘Act’).
- The GAAR provisions will also not be applied in cases where a taxpayer adopts genuine tax mitigation strategy by availing fiscal incentives afforded by the tax legislation. For example availment of tax holidays by setting up new units in SEZs should not result in invocation of GAAR.
- The Notes clearly state that the onus of proving an impermissible avoidance arrangement lies on the Revenue authorities. Such onus would involve proving:
- there is an arrangement;
- which leads to a tax benefit;
- the main purpose or one of the main purposes of the arrangement was to obtain the tax benefit; and
- the arrangement exhibits one of the prescribed characteristics.
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