General Anti-Avoidance Rule (GAAR)


What is GAAR

General Anti-Avoidance Rule (GAAR) is part of the 2012-13 Budget speech of the then Finance Minister Pranab Mukherjee to check tax evasion and avoidance. The objective is to "counter aggressive tax avoidance schemes." 

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.

What are its implications

It empowers officials to deny the tax benefits on transactions or arrangements which do not have any commercial substance or consideration other than achieving tax benefit. It contains a provision allowing the government to retroactively tax overseas deals involving local assets (like Vodafone). It could also be used by the government to target participatory notes (P-Notes).

Will P-Notes be targetted

 Investments into Indian stock markets through participatory notes might slow after the introduction of GAAR. According to data from market regulator SEBI, P-notes issuance reached Rs. 1.83 trillion at the end of February, about 16.4% of total assets under the foreign investor inflow scheme. P-Notes are instruments used by investors or hedge funds that are not registered with the SEBI to invest in Indian securities and they offer the buyer anonymity. The tax would be imposed on the registered financial firm buying the security on behalf of the client, meaning the brokerage would then pass on the taxes to the end investor.

Brokerage firm Macquarie has said that stocks bought through participatory notes could be subject to short-term capital gains tax of 42% and long-term capital gains tax of 21% as a result of the new taxation proposals. CLSA, another brokerage firm, has stopped selling P-notes.

"To avoid tax altogether under GAAR, an investor may now have to prove the P-note was not set up specifically to avoid paying taxes or to prove that the deal has "commercial substance," Edelweiss said.

What happens to the Mauritius route

GAAR could give powers to the tax department to deny double taxation treaty benefits to foreign funds based out of tax-havens like Mauritius. India has a Double Taxation Avoidance Agreement with Mauritius. Overseas portfolio investors, routing their investments via countries like Mauritius, currently do not pay any tax on short-term capital gains. 

"If the bill is passed as it is, then from 1st April 2012, FIIs domiciled in such treaty locations may have to prove that they have created this structure for genuine business purposes and not just for avoidance of tax," Domestic brokerage IIFL said in a note.

What do investors say

This is what Adrian Mowat of JP Morgan Securities told NDTV Profit. The proposed law gives the legal right to the government to go after anyone and it added ambiguity over the taxation. Indian equities will see selling by foreign investors & less money will be coming into India consequently. Investors are very uncomfortable about GAAR in current form. FIIs run global portfolios & some invest just 1% in India. After this they might say its not worth the hassle. The move is bad for Indian economy, bad for Indian corporate, bad for Indian capital markets. 
                                                                     GAAR from Apr 1, 2017

Seeking to assuage investor concerns ahead of implementation of GAAR from April 1, the Tax Department on January 27, 2017 said the provisions of tax avoidance rules will not apply to a transaction that does not carry a tax benefit based on the jurisdiction it is routed through.
Adequate procedural safeguards are in place to ensure that General Anti—Avoidance Rules (GAAR), which seek to prevent companies from routing transactions through other countries to avoid taxes, are invoked in “a uniform, fair and rational manner“.
GAAR, it said, will come into force from April 1 and can be invoked only through a two—stage process involving a nod at the level of principal commissioner of income tax and a panel headed by a high court judge.
The new rules give tax authorities the right to scrutinise and tax transactions which they believe are structured solely to avoid taxes.
But it “will not interplay with the right of the taxpayer to select or choose method of implementing a transaction”, the Central Board of Direct Taxes said in clarifications on GAAR.
GAAR provisions shall be effective from assessment year 2018—19 and “shall not be invoked merely on the ground that the entity is located in a tax efficient jurisdiction,” it said. “If the jurisdiction of FPI is finalised based on non—tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, GAAR will not apply.”
This essentially means that any transaction that carries a tax benefit could be questioned. The taxman may potentially want to know whether the transaction was done in the normal course of business or conducted simply with the intention to avoid taxes.
India will be the 17th nation in the world to have laws that aim to close tax loopholes. Beginning with Australia in 1915, GAAR is in force in nations like Singapore, China and the UK.
CBDT said the adoption of anti—abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies and the same are required to be tackled through domestic anti—avoidance rules.
“However, if a case of avoidance is sufficiently addressed by Limitation of Benefits (LoB) provisions in the tax treaty, there shall not be an occasion to invoke GAAR,” it said.

Friday, 27th Jan 2017, 10:27:21 AM

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