What is GAAR?

GAAR is an essential part of dealing with international taxation. The Shome Committee describes GAAR as ‘an extremely advanced instrument of tax administration’

Countries impose various types of taxes on their citizens to raise revenue for government spending. Taxpayers may minimise their tax liabilities by arranging their affairs in a manner that is termed tax efficient i.e. through tax mitigation. This does not include tax evasion.

Tax evasion through suppression of facts is illegal. Tax reduction through legal means is increasingly considered a matter of right by taxpayers. But, tax reduction through unethical means should not be allowed—particularly when effective rates of tax are unduly reduced. This has led to the introduction of anti-avoidance rules in tax statutes across tax jurisdictions internationally.

The Finance Act 2012 introduced the general anti-avoidance rules (GAAR) in the Income-tax Act, 1961. GAAR is an essential part of dealing with international taxation. The main objective of the Shome Committee was to get feedback from stakeholders and prepare new guidelines or to amend previous guidelines after examining things finely. The Committee was constituted by the Central Board of Direct Taxes after being approved by prime minister. The GAAR report was submitted to the finance ministry on 1 September 2012.

Purpose of Shome Committee

  • To receive feedback from both public and stakeholders on the guidelines of GAAR mentioned on the website of Government of India. 
  • To rework on the guidelines following the feedback received and examining the same and then publish the same in second draft. 
  • To find out and finalise guidelines along with a road-map for implementation of GAAR and submit it to the government.

The Committee consists of Dr Parthasarathi Shome; N Rangachary, former chairman, IRDA; Dr Ajay Shah, professor, NIPFP and Sunil Gupta, joint secretary, tax policy & legislation, Department of Revenue. Dr Shome is the chairman of the Committee.

The Shome Committee in its report has tried to create a balance between investors being invited to the country and protection of the tax base from tax avoidance and evasion, using aggressive tax planning.

The Committee recommendations for amendments in I-T Act, 1961

  1. The Shome Committee said that implementation of GAAR may be postponed by three years on administrative grounds. GAAR is an extremely advanced instrument of tax administration for which intensive training of tax officers, who would specialise in the finer aspects of international taxation, is needed. The Shome panel proposed the implementation of GAAR to be deferred to April 1, 2016.
  2. Abolish tax on gains arising from transfer of listed securities to both residents as well as non-residents
  3. GAAR should not be invoked in transactions between associated persons which may result in tax benefit to one person. But overall tax revenue is not affected either by actual loss of revenue or deferral of revenue.
  4. GAAR is to be applicable only in cases of abusive, contrived and artificial arrangements.
  5. A monetary threshold of Rs. 3 crore of tax benefit (including tax only, and not interest, etc) to a taxpayer in a year should be used for the applicability of GAAR provisions.
  6. Grandfathering an existing arrangement (instead of existing investments) may inadvertently keep many future advance tax avoidance schemes out of examination under GAAR since a tax avoidance structure itself would receive indefinite protection—and diminish the effectiveness of GAAR. Grandfather clause is a situation in which an old rule continues to apply to some existing situations, while a new rule will apply to all future situations.
  7. Where SAAR is applicable to a particular aspect, GAAR shall not be invoked.
  8. GAAR will apply to income of the previous year, relevant to the assessment year in which GAAR becomes effective and subsequent years.

The Shome Committee said that GAAR guidelines should be introduced in India at the time of economic stability. Hence, it has recommended the postponement of its implementation by three years. To provide clarity on GAAR’s applicability provisions in different situations, 27 illustrations were made and are mentioned under conditions like:

1. Tax mitigation: GAAR can’t be invoked 
2. Tax avoidance: SAAR is applicable hence GAAR is not invoked
3. Court approved amalgamations or demergers
4. Tax avoidance: GAAR invoked
5. Tax evasion can directly be dealt of law without invoking GAAR

The Committee describes GAAR as “an extremely advanced instrument of tax administration”, meant to deter misuse or abuse of tax law through complex and contrived arrangements.

Source: Ministry of Finance, Government of India

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