India: GAAR And New Developments

Nowadays GAAR has become one of the most discussed and talked about topic in Indian Tax Environment. GAAR or General Anti- Avoidance Rules are expected to have long term and widespread effect. Whenever any change of massive magnitude, such as GAAR is proposed or introduced, there are bound to be discussions, oppositions, however affect of a new legislation/amendment should be analysed as a whole to access its overall impact.

Need for GAAR

There is a difference between Tax Evasion, Tax Mitigation and Tax Avoidance. Tax Mitigation is permitted by Law; it means to apply provisions of law to minimize effect of Taxation or in other words tax structuring is within four corners of law and hence permitted. Tax Evasion is completely outside the ambit of Tax Law and hence not permitted. Tax avoidance is restructuring financial position of an individual or entity in such a way as to lower its Income tax liability. Tax avoidance, like tax evasion, seriously undermines the achievements of the public finance objective of collecting revenues in an efficient, equitable and effective manner. GAAR is targeted at curbing the practice of 'Tax Avoidance'. In other words GAAR prohibits structures or deals only aimed at avoiding tax.

GAAR and Current Scenario

GAAR was introduced with the introduction of Finance Bill of 2012. However provisions contained in the proposed Finance Act, in Chapter XIII under the head GAAR have gone through a lot of controversies. The result of these controversies is setting of an Expert panel by Prime Minister for creating guidelines for general anti avoidance rules (GAAR). GAAR has been opposed by many industry experts and Foreign Investors as going against business environment in India.

However, effective taxation regime and control is also important for overall progress of an economy. Therefore GAAR provisions cannot be per se classified as negative or not in favour of business growth. Setting of Panel by Respected Prime Minister is an indication of concern over implementing GAAR in its right spirit. An Expert Panel has been constituted on GAAR to undertake stakeholder consultations to finalize the guidelines for GAAR. Some provisions of GAAR have attracted a lot of criticism from foreign investors, therefore main target of setting up of Panel is reviewing provisions of GAAR to critically analyze the same and try to address the concern of Investors wherever possible, without defeating the main purpose of GAAR.

One of the main areas of concern for investors is that GAAR empowers Tax authorities to declare an arrangement as invalid, if it is entered into by the assessee with the objective of obtaining a tax benefit. Therefore, under proposed provisions of GAAR, power given to tax officials is subjective in nature and tax officials have wide-ranging powers to declare any arrangement as 'an impermissible avoidance arrangement'.

Secondly, under GAAR provisions, onus to prove is on the assessee that tax benefit is not the main purpose of an impugned arrangement. An anti-abuse provision that shifts the burden of proof on the assessee goes against the fundamental principle of 'innocent unless proven guilty'.

Another area of major concern for foreign investors is in the context of applicability of Double taxation avoidance treaties. Therefore GAAR has a very vide coverage, however its effect on tax treaties should be critically analysed and reviewed.

GARR and the Foreign Institutional Investors

The Committee tasked with drawing up General Anti Avoidance has further been asked by Prime Minister also to examine the impact of the retrospective change in the Income Tax law on foreign institutional investors and portfolio investors.

Amendments by way of GAAR have been proposed primarily targeting the much publicized case of Vodafone- Hutch deal, which has been in the crosshairs of the Indian tax authorities for not withholding tax on its $11 billion acquisition of a controlling stake in the Indian telecom company Hutch Essar from Hong Kong based Hutchison Wampoa in a deal executed by buying a company registered in the Cayman Islands.

The Supreme Court had set aside the $2 billion tax demand slapped on Vodafone by the tax authorities but the retrospective amendment allows the government to renew the demand on Vodafone. The I-T department is yet to send a notice.

Though the reference to the committee is to look at only the impacts on portfolio investments, experts say it could provide the government grounds to dilute the controversial change1.


It is expected that Guidelines on GAAR will be finalized by September end this year and will hopefully answer all the concerns of Foreign as well as Indian Investors. Underlying principle of these guidelines is to help tax authorities to curb the practice of tax avoidance and hence achieve the broader objective of overall public welfare. Revenue from taxes is the main source of finance for investment in projects for public improvement; therefore, any attempt aimed at avoiding tax cannot be appreciated.

However, foreign investment is also equally important for a developing country, like India's overall progress. It is important that there should not be ambiguities in taxation regime of a country. With the issue of Guidelines on GAAR all confusion surrounding its application will most probably be cleared.

GAAR's implementation has also been deferred to financial year 2013, which will enable foreign investors to plan their investments in advance, after considering overall effect their investments will attract, including the applicability of GAAR.



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