Insights into Editorial: GAAR as a Deterrent to Tax Avoidance
The General Anti-Avoidance Rules (GAAR) regime in India kicked off from April 1. The objective is to deter taxpayers from entering into abusive and contrived schemes. While such intentions to avoid the misuse of tax laws are welcome, people are very apprehensive, largely because tax authorities will have wider powers under GAAR to challenge any given arrangement.
Need for GAAR:
Between the two extremes of tax planning and tax evasion lies tax avoidance, a form of abusive tax planning complying with the letter, but not the spirit of the law; for instance, a transaction structured in a manner with the sole intention of tax benefit, but not for any substantial business consideration. Further, using convoluted structures, companies were set up in tax jurisdiction only to avail the benefits of the double taxation avoidance agreements (DTAAs), that is, treaty shopping was practiced. The objective of GAAR is to curb such practices.
Application of GAAR:
The provisions of GAAR are to be applied to an impermissible avoidance arrangement (IAA), in simpler terms, an arrangement designed with the objective to avoid tax.
- To determine an IAA, the following factors are to be considered: (i) purpose of the arrangement is to obtain tax benefit; (ii) it is not at an arm’s length price; (iii) it lacks commercial substance; (iv) it results in abuse of the tax law; and (v) it is not carried out in an ordinary manner.
- Procedural safeguards have been provided in the form of a three-tier mechanism to remove arbitrariness. The system starts with the assessing officer, the principal commissioner of income tax and, finally, the approving panel (which includes a retired high court judge). A period of six months is allowed to decide the applicability of GAAR.
- Besides, GAAR has a non-obstante provision, which can override all other provisions of the Income Tax Act, 1961, including SAAR.
The present scheme of GAAR addresses most of the concerns raised by the industry, yet the anxiety in its implementation is apparent.
- The Indian text of the GAAR provisions is broadly worded and has a much wider scope of applicability as compared to other jurisdictions. Further, there are concerns such as the interplay between GAAR and DTAAs, the thin line of difference between tax planning and tax avoidance, the co-existence of GAAR and Specific Anti-Avoidance Rules (SAAR), the scope of conflicting interpretation over IAAs, the functioning of the approving panel, etc.
- The discretionary powers to invoke GAAR and undo a transaction that complies with the provisions of the existing tax regime may extensively hinder the business environment.
The tax authorities must understand and appreciate that the assesses are not hesitant to pay tax but are apprehensive about the uncertainties in the tax regime.
Uncertainties in the tax regime reduce the ease of doing business. The ministry and the concerned departments should strive to mitigate these uncertainties to boost investor confidence in the Indian economy. The arbitrary use of GAAR will drive away investments necessary for economic growth. There is a need to factor in this ground situation to ensure GAAR does not end up choking efficient tax planning. GAAR will require walking a tight rope to strike a balance between conflicting interests, like revenue collection and taxation planning. This certainty will boost investor confidence and create a win-win situation for both the government and taxpayers.