Internationally, tax avoidance has been recognized as an area of concern. Several countries have expressed apprehension over tax evasion and avoidance. This is also evident from the fact that nations are either legislating the doctrine of General Anti-Avoidance Regulations in their tax code or strengthening their existing code. India has also sought to address the issues relating to tax avoidance and evasion by bringing in General Anti-Avoidance Rule (GAAR) in addition to various transaction-specific Special Anti-Avoidance provisions. There has been a continuing debate and controversy on the difference between avoidance of income tax and evasion of tax. Avoidance is supposed to be within the law whereas evasion is illegal. But the controversy is because avoidance is done in a circuitous manner and though each action by itself is not illegal, the whole transaction together amounts to a benefit of tax that was never intended by the tax law. In other words, what is not permitted directly is done indirectly. Therefore, judicial decisions have termed such activity illegal though there is no unanimity in this respect. There are well-known judgments of the Supreme Court that have settled the principle that no judicial interpretation should be made in such a way that it encourages evasion.
What is GAAR?
The Finance Act 2012 introduced general Anti-avoidance rule under Chapter X-A of Income-tax Act, 1961. However, the provisions are made operative with respect to any assessment year beginning on or after 01-04-2018. GAAR is an anti-tax avoidance regulation having been codified in the Indian income-tax law to counter aggressive tax planning arrangements which have an impact on eroding India’s tax base. These provisions empower the Indian revenue authorities to declare an arrangement as an “impermissible avoidance arrangement,’ if the main purpose of the agreement is to obtain a ‘tax benefit’, and the arrangement lacks or is deemed to lack commercial substance. GAAR reflects substance over form principle wherein commercial reality of a transaction is looked upon ignoring the legal arrangement, where the primary purpose of the transaction is to avoid taxes, and the commercial and legal form do not correspond with each other. GAAR does not apply to bona fide transactions which have a legitimate commercial purpose even if they result in significant tax savings.
The applicability of GAAR Involves following three steps:-
- First, if there is any tax benefit arising from an arrangement or part of the arrangement. Tax benefit being benefit in the form of tax avoidance, reduction, deferral, excess refund, or claiming excess deduction or lower profit (sec 102(11))
- Second, determine whether the arrangement is a tax avoidance arrangement, i.e., it holds purpose other than the bona fide purpose, thus to obtain a tax benefit.
- Third, to determine if the arrangement is an impermissible tax avoidance arrangement.(sec 96 (1))
Tax avoidance is legal. Now large scale revenue loss is occurring due to aggressive tax planning by corporates using tax avoidance opportunities. Governments in many countries are introducing anti- avoidance rules to check this revenue loss from excessive tax avoidance mechanism. Countries like Canada, Germany, France, etc., have already introduced GAAR in order to prevent tax base of the country from erosion through this anti-avoidance measure. Considering the continuing difficulties of classifying the transactions as being acceptable within the framework of the law or not, need is being felt to move towards structured approach to address the issue of tax avoidance, both from legal and economic view point.
GAAR in India:
In India, the concept of GAAR was introduced with the Direct Tax Code Bill (“DTC Bill”) on August 2009. Later on, a revised discussion paper was released with provisions containing the GAAR under DTC Bill 2010. The bill aimed at introducing the GAAR involving DTC from 1st April 2012 onwards.
The GAAR provisions were introduced in the 2012-13 budget by the then Finance Minister, Pranab Mukherjee. But several of its provisions were criticized because of lack of clarity, lack of safeguards and increased scope for subjective authorization by the tax officials.
Subsequently the government set up a panel under Parthasarathy Shome to review the proposals. The Committee, suggested that the rules be deferred by three years to 2016-17, arguing that more time was needed to create administrative machinery for its implementation and called for intensive training of the officials.
According to the press release by the Central Board of Direct Taxes (“CBDT”), GAAR provisions had to be effective from April 1, 2017 onwards, i.e., from financial year 2017-18 onwards. The provisions of GAAR are contained in Chapter X-A of the Income Tax Act, 1961 (“The Act”). The procedures for application of GAAR and conditions, under which it shall not apply, are enumerated in the Income-tax Rules, 1962.