AIR spotlight summary on “General Anti Avoidance rule (GAAR) and its Advantages”.
General Anti Avoidance rule (GAAR) is a set of rules or a framework which helps the revenue authorities decides whether a particular transaction has commercial substance or not. If it does not have commercial substance and is not a genuine transaction then what should be the tax liability associated with it.
Why GAAR is necessary?
- GAAR was originally proposed in Direct Tax Code of 2009 and was postponed for implementing it. GAAR is a set of rules that helps tax authorities decide whether a commercial entity has entered into an arrangement with another entity or a subsidiary of it to avoid paying taxes to the government. The entities take the advantages of the loopholes present in the tax structure. GAAR is different from tax evasion or tax mitigation which are illegal activates.
- GAAR will address those cases which are technically not illegal but those cases which are not ethical.
- There has been a study done by different organisations like PWC which has identified how countries have implemented GAAR from a very long time like Australia implemented GAAR in 1981, China and Germany in 2008.
Importance of GAAR
- The objectives of any tax laws are to promote or incentivise real investments. GAAR will allow the government to raise more revenue. It empowers the revenue authorities to generate more revenue from all those transactions which are not paying their taxes.
- The government has been very focused on the fiscal deficit and is implementing fiscal consolidation plan and has been able to bring the fiscal deficit from 3.9% to 3.5%. The tax revenues of both direct and indirect taxes have shown buoyancy. Through the Income Disclosure Scheme or Demonetisation there has been a continuous aim at increasing tax revenues and direct them towards the welfare schemes. The entire GAAR activity would also enhance the tax revenue of the government which further adds to lower the fiscal deficit.
- GAAR helps in bringing competitive advantages to several businesses that have been doing genuine transactions against those businesses that have been misusing the loopholes of the tax structure. Thereby it creates a better business environment for the people to recognise that the state exists for the purpose of bringing genuine investments. This will help towards ease of doing business and would recognise India as a serious country promoting free and fair trade practices rather than providing free tax advantages.
- Globally there has been a low growth rate and the economies have recovered from the global financial crisis and they are still not able to reach the levels of expectations. There have been accommodative monetary policies, expansionary fiscal policy and protectionism in the global scenario. However India has been showing very encouraging results of 7.1% growth rate which more than China’s growth rate. So it may be the right time to implement GAAR in India.
Interpretation of GAAR provisions
- Since GAAR gives more powers to the revenue authorities, people were concerned about the wider and the arbitrary interpretations the revenue authorities may have regarding the GAAR provisions. Many of the committees have been trying to address the difficulties the tax payers may face in case the GAAR provisions are implemented. So all the committees have tried to see that GAAR provisions are implemented in such a manner that they do not allow arbitrary interpretations that lead to harassment of the tax payers.
- There have been developments with specific anti avoidance regulations and together with GAAR it would help the tax authorities to plug the loopholes which people have been using to avoid taxes.
- GAAR will be implemented from 1st April, 2017 and the government has considered the minimum threshold where the GAAR provisions can be implemented. The genuineness of the transactions remains intact and only covers those transactions which have been taking an advantage of the loopholes present and the small tax players will not to be harassed.
Cases of Tax Avoidance
- For example the government gives a fiscal incentive of a tax holiday in an SEZ unit. A company set up a factory in an SEZ with defunct machineries and do not produce anything here and produce somewhere else and show it as the produce at the SEZ unit and take a tax holiday. This is a case of tax avoidance. There are other cases where certain companies are based in low taxed jurisdictions and by evoking double taxation treaty they pay lower taxes like in Mauritius and Singapore.
- In another case suppose there is only a registered office in the low tax jurisdiction like Mauritius or Singapore which does not perform any particular work and all the activities are performed in different country say in India. By this there is no beneficial work happening in Mauritius or Singapore and taking the advantage of the tax laws. In this case the tax has to be paid where the actual work or business is being performed.