GAAR: Complete analysis (to be implemented from April 1,2017)

Date: January 29, 2017

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The Narendra Modi government issued clarification that GAAR, that is General Anti-Avoidance Rule, will come into effect from April 1, 2017. The General Anti Avoidance Rule (GAAR) provisions shall be effective from the Assessment Year 2018-19 onwards, i.e. Financial Year 2017-18 onwards, the Finance Ministry said in a press release.

In India, the GAAR concept was introduced with the DTC Bill on August 2009. Later, a revised discussion paper was released with provisions containing the GAAR under DTC Bill 2010. The bill aimed to introduce the GAAR involving DTC from 1st April 2012 onwards. The GAAR provisions were introduced in the 2012-13 budget by the then Finance Minister Dr. 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.

The government subsequently 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 is needed to create administrative machinery for its implementation and called for intensive training of officials.

According to the press release by CBDT (Central Board of Direct Taxes), GAAR provisions shall be effective from assessment year 2018-19 onwards, i.e. financial year 2017-18 onwards.

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What is GAAR?

Each component of the expansion of GAAR will give some idea about it. GAAR is General Anti Avoidance Rule and hence it is an anti-tax avoidance regulation. As the name suggests, it is set of laws aimed at curtailing tax avoidance in general. GAAR is set of rules under the Income Tax Act (under the proposed Direct Tax Code) which empowers the revenue authorities to deny tax benefits transactions or arrangements which do not have any commercial substance or consideration other than achieving the tax benefit. 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.

What is tax avoidance?

Tax avoidance is deliberate measures to avoid or reduce tax burden by an individual or a company. Tax avoidance, is by and large not defined in taxing statutes. Tax avoidance is, nevertheless, the outcome of actions taken by the assessee, which is not illegal or forbidden by the law as such. The purpose here is to reduce tax burden.

Why GAAR?

Tax avoidance is legal; but now, large scale revenue loss is occurring due to aggressive tax planning by corporate using avoidance opportunities. Governments in many countries are introducing anti- avoidance rules to check this revenue loss from excessive avoidance.

What is the difference between GAAR and SAAR?

Anti-Avoidance Rules are generally existing in many countries in two categories, viz, general and specific. In the case of the former, the legislation will be GAAR whereas in the case of the latter, the legislation is in the form of Specific Avoidance (SAAR). Special rules are targeted at individual, case by case specific provisions. Legislations with respect to general rules are known as GAAR and legislations with respect to special rules are known as SAAR.