General Anti-Avoidance Rule (GAAR)

What is the General Anti-Avoidance Rule (GAAR)?

So, what is General Anti-Avoidance Rule? General Anti Avoidance Rule in India is the anti-tax avoidance law that curbs tax evasion & avoids tax leaks. It was put into effect on April 1, 2017, although it was recommended initially in the 2009's Direct Tax Code. GAAR includes a set of rules leveraged by the country's revenue authorities against aggressive tax planning to avoid tax.

Parthasarathy Shome chaired a committee that suggested deferring its implementation by three years. It indicated the necessity to set forth the administrative machinery and train employees for full-scale implementation.

Why was General Anti-Avoidance Rule (GAAR) Introduced in India?

The prime purpose of introducing GAAR provisions was to change the tax policy of India and bring forth simplification in legislation. So, GAAR provisions codify the principles of commercial substances over form and bring law principles as concluded in different landmark court judgements.

GAAR was brought by the  Indian government in order to curb tax evasion & avoid any form of tax leaks. India brought this tax law after the popular case of Vodafone International. Vodafone's deal with Hutchison-Essar made headlines, and soon it became the biggest sensation in the history of Indian taxation.

That was the prime reason for the framework of GAAR. The transaction occurred in the Cayman Islands. As per the government, around USD 2 billion in taxes was completely lost.

In simple words, GAAR is an effective tool that checks the aggressive tax planning of businesses that aim to avoid tax. It aims to cut revenue losses occurring to the government because of aggressive tax avoidance tactics that organisations practice.

Tax Avoidance versus Tax Evasion

To differentiate tax evasion from tax avoidance, you need to note down the following points:

Prime Objective 

Tax evasion is the process of eliminating taxes completely. Businesses or individuals use it to lie to authorities in immoral ways, thereby reducing tax liability. On the other hand, tax avoidance is the legal and moral method of minimising tax liability. The prime objective of tax avoidance is to reduce the amount of tax that the individual or business owes.

Nature

Tax evasion is an illegal method that minimises tax liability. But tax avoidance is the legal method that helps individuals or businesses reduce the amount of tax they owe. Tax evasion occurs once the tax becomes due. But tax avoidance may occur even before tax liabilities.

Repercussions

Since tax evasion is illegal, it may lead to imprisonment or fines (at times both). But tax avoidance may be performed legally. If you use loopholes to purposely avoid taxes, you might attract legal penalties. But tax avoidance is never a criminal offence.

Tax evasion can be done illegally, but tax avoidance is usually done through legal acts, such as tax planning. So, these points elucidate the difference between tax evasion and tax avoidance.

GAAR Proposals

GAAR proposes the fundamental imposition of taxes on the types of arrangements that chiefly aim to avail of tax benefits or don't consist of any commercial substance. General Anti Avoidance Rule in India can be invoked when the tax avoidance goals don't follow some business principles.

So, what happens in terms of foreign investors? In such circumstances, GAAR is applicable to the ones who haven't taken benefits under the DTAA or Double Taxation Avoidance Agreement.

Now what is DTAA? Simply put, Double Taxation Avoidance Agreement (DTAA) enables NRIs working abroad to avoid paying taxes twice on the income from the country of residence and their home country.

What are the GAAR General Anti-Avoidance Rules?

The GAAR provision first appeared under 1961's Income Tax Act. The Department of Revenue under the Finance MInitry has framed the GAAR rules. These rules aim to cut down revenue losses occurring to exchequers because of aggressive tax avoidance measures performed by organisations.

GAAR was suggested in 2009's Direct Tax Code, but it was later introduced in India in 2012's Budget session of Parliament. Parthasarathy Shome's committee reviewed its proposals. And it was recommended to defer proposals to three more years. The need to establish administrative machinery and training for staff became necessary. So, the law was put into effect in 2017 and applied from 2018-2019.

Threshold Limit for GAAR Applicability

When it comes to the General Anti-Avoidance Rules (GAAR) in India, there is an important monetary threshold that determines when these provisions can be invoked. GAAR is not applied on every tax planning strategy, it only kicks in where the tax benefit arising from an arrangement in a given assessment year exceeds ₹3 crore (₹30 million). 

This threshold is calculated based on the aggregate tax benefit obtained from the arrangement, not on the total income or turnover of the taxpayer. In other words, if multiple parties are involved in a single arrangement, the combined tax advantage must be more than ₹3 crore in that year before GAAR provisions can be considered. 

The purpose of setting this limit is to ensure that GAAR targets significant and potentially abusive tax avoidance transactions, rather than routine tax planning that results in modest savings.

Wrapping up

The government has brought forth more clarifications and improved guidelines to balance investors' interest in the economy while fighting with anti-abusive provisions. So, tax authorities should consider the ground realities and initiate businesses accordingly.