GAAR - What is GAAR by Rajesh Goyal 
Collected from the website allbankingsolutions.com
What is full form of GAAR ? or What is GAAR ?
The full form of GAAR is : General Anti-Avoidance Rules
What is GAAR in simple terms ?
Tax Avoidance is an area of concern across the world. The rules are framed in different countries to minimize such avoidance of tax. Such rules in simple terms are known as " General Anti Avoidance Rules " or GAAR. Thus GAAR is a set of general rules enacted so as to check the tax avoidance.
Why News for GAAR has been prominent in India in recent times ?
News for GAAR has been in prominence in last few years as Indian Government has taken initiative to introduce GAAR or General Anti Avoidance Rules with a view to increase tax collections.
Background for GAAR :
Lord Tomlin has well said "Every man is entitled to order his affairs so that tax attaching under the appropriate Acts is less than it otherwise would be" (IRC v Duke of Westminster). People adopt various methods so that they can reduce their total tax liability.
The methods adopted to reduce their tax liability can be broadly put into four categories : "Tax Evasion"; "Tax Avoidance", "Tax Mitigation" and "Tax Planning". The difference between these four methods some times becomes blurred owing to the perception of the tax authorities and / or tax payer. [Click Here to read the difference between Tax Evasion", "Tax Avoidnace" , "Tax Mitigation, Tax Planning].
GAAR refers to the second category i.e. tax avoidance.
What is Difference between GAAR and SAAR ?
Anti Avoidance Rules are broadly divided into two categories namely "General" and "Specific". Thus, legislation dealing with "General" rules are termed as GAAR, whereas legislation dealing with "Speicifc avoidnace are termed as "SAAR"
In India till recently SAAR was in vogue i.e. laws were amended to plug specific loopholes as and when they were noticed or were misused enmasse. However, now Indian tax authorities wants to move towards GAAR but are facing severe opposition as tax payers fear that these will be misused by tax authorities by giving arbitrary and wide interpretations. We can say SAAR being more specific provide certainty to taxpayers where as GAAR being general in nature can be misused and is subject to arbitrary interpretation by tax authorities.
GAAR Definition :
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.
GAAR in India
In India, the real discussions on GAAR came to light with the release of draft Direct Taxes Code Bill (popularly known as DTC 2009) on 12th August 2009. It contained the provisions for GAAR. Later on the revised Discussion Paper was released in June 2010, followed by tabling in the Parliament on 30th August, 2010, a formal Bill to enact the law known as the DirectTaxes Code 2010. The same was to be made applicable wef 1st April, 2012. However, owing to negative publicity and pressures from various groups, GAAR was postponed to at least 2013, and was likely to be introduced alongwith the Direct Tax Code (DTC) from 1st April 2013. Moreover, an Expert Committee has been set by Prime Minister (Manmohan Singh) in July 2012 to vet and rework the GAAR guidelines issued in June 2012. The latest reports (September 2012) indicates, it may not be implemented even for 3 years i.e. this will be postponed for 3 years (2016-17). Some of recent developments about GAAR are :-
(a) 16th March, 2012 : Finance Minister, Pranab Mukherjee takes a tough stand and announces that the government will crack down on tax avoidance effective from fiscal year 2012-13
(b) 7th May, 2012 : Finance Minister, Pranab Mukherjee forced to eat his words and agreed to defer GAAR by a year as his announcements spooked oversea investors
(c) 28th June, 2012 : Finance Ministry releases first draft on GAAR; There is wide criticism of the provisions.
(d) 14th July, 2012 : PM, Manmohan Singh, forms review committee under Parthasarathi Shome, for preparing a second draft by 31st August and final guidelines by 30th September, 2012
(e) 1st September, 2012 : Shome Committee recommends to defer GAAR by three years. It also recommends some more investor friendly measures
What is the Basic Criticism of GAAR ? Why GAAR is dreaded ?
Many provisions of GAAR have been criticised by various people. However, the basic criticism of GAAR provisions is that it is considered to be too sweeping in nature and there was a fear (considering poor record of IT authorities in India) that Assessing Officers will apply these provisions in a routine manner (or read misuse) and harass the general honest tax payer too. There is only a fine distinction between Tax Avoidance and Tax Mitigation, as any arrangement to obtain a tax benefit can be considered as an impermissible avoidance arrangement by the assessing officer. Thus, there was a hue and cry to put checks and balances in place to avoid arbitrary application of the provisions by the assessing authorities. It was felt that there is a need for further legislative and administrative safeguards and at least a minimum threshold limit for invoking GAAR should be introduced so that small time tax payers are not harassed.
Two Examples to Understand GAAR provisions : (Source GAAR Committee)
Example 1:
Facts:
A business sets up an undertaking in an under developed area by putting in substantial investment of capital, carries out manufacturing activities therein and claims a tax deduction on sale of such production/manufacturing. Is GAAR applicable in such a case ?
Interpretation:
There is an arrangement and one of the main purposes is a tax benefit. However, this is a case of tax mitigation where the tax payer is taking advantage of a fiscal incentive offered to him by submitting to the conditions and economic consequences of the provisions in the legislation e.g., setting up the business only in the under developed area. Revenue would not invoke GAAR as regards this arrangement.
Example 2:
Facts:
A business sets up a factory for manufacturing in an under developed tax exempt area. It then diverts its production from other connected manufacturing units and shows the same as manufactured in the tax exempt unit (while doing only process of packaging there). Is GAAR applicable in such a case ?
Interpretation:
There is an arrangement and there is a tax benefit, the main purpose or one of the main purposes of this arrangement is to obtain a tax benefit. The transaction lacks commercial substance and there is misuse of the tax provisions. Revenue would invoke GAAR as regards this arrangement.
Analysis of the provisions proposed to be introduced under GAAR through Finance Act 2012 ? What are the recommendations of Expert Committee / Shome Committee for changes in the GAAR earlier proposed to be introduced.
What is Grandfather clause :
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. Frequently, the exemption is limited; it may extend for a set period of time, or it may be lost under certain circumstances. An exemption that allows persons or entities to continue with an activity they were engaging in before but the same activity is not allowed to new entities. For example, a car manufacturer is allowed to produce cars with certain environment norms, but new entities are required to fullfil strictly norms.
MY OPINION ON GAAR IS GIVEN BELOW
If
a serviceman earns Rs.10.0 lacs per year, he has very limited scope to avoid
tax payment. He can at best save some money in tax saving schemes and reduce
tax liability by at most 20 to 30 thousand rupees. He will have to pay Income
tax to the tune of rupees one to two lacs as income tax per year.They cannot
avoid tax payment but they can earn bribe up to any extent to compensate they
lose in tax payment.
But
a manufacturing company earning profit of more than one crore per year can
avoid tax payment completely by using various tools of tax avoidance suggested
by tax officials, tax consultants and Chartered Accountants. In India one may
find persons for firms in every town who guide businessmen how to avoid tax
payment, who suggest various illegal tips for tax evasion and who works as broker
for tax assessing officials and setting bribe sharing rates among tax officials
, businessmen and broker himself for passing of IT assessment order form tax
offices.
River
of black money flaws from these the houses of these business icons only who knows
many ways of tax avoidance and who are master in creation of black money. It is
they who keep politicians happy and who in turn provide safety net from the
clutches of tax officials. They work in nexus with each other.
Similarly
there are lacs of such doctors, chartered accountants or property valuers,
,builders , chartered engineer ,cine artists , tax consultants, stock brokers
earning more than Rs.10.00 lacs per year but not paying Income tax at all
or paying hardly a few thousands of rupees for name sake or for
maintaining a Income tax file and keeping himself as tax payee
A
service man earning 3 to 5 lacs rupees per years will have to pay income tax to
the tune of 10 to 2o thousand rupees .But in India there are crores of traders
who are earning more than ten lac rupees per year but not paying any tax or
paying a few hundred rupees as income tax. These small traders and service
providers are completely outside the purview of income tax or sales tax
officials . They have to give a few thousands of rupees as Baksis (which means
bribe) to tax officials from time to time.
As
long as ministers in particular and politicians in power are corrupt, illegal
money earners and are tax evaders, they cannot imagine of making any hard and
effective law to completely stop tax evasion.
As
a matter of fact tax evasion and creation of black money and then parking it in
banks in fake name or investing in landed property or parking the same at
foreign banks is no new thing in India. Really speaking, politicians cannot
survive if businessmen start honest payment of all taxes, complete tax
compliance and stop all types of tax evasion.
Problems
arise only when businessmen fail to pay committed bribe and commissions to
brokers or tax officials or to politicians. Problems arise only when there is
dishonesty in sharing of ill earned money among various persons of tax
department. Problems arise when there is inter corporate or inter businessmen
rivalry and when the one or the other businessmen complains against his rival businessmen.
Problems arise only when the business houses give donation to one political
party and avoid other political party. Problems arise only when ego issue
clashes among tax officials, politicians and business houses.
As
far as I understand, government of India has framed several laws during last
six decades and more to deal with black money and to reduce the instances of
tax evasion. GOI has also come out various schemes during last six decades for
voluntary disclosure of black money by businessmen and tax evaders in general
.they know very well how tax evasion have been taking place in entire country
and in all sectors .It is politicians who are the root cause of all such non
compliances of tax rules framed by none other than politicians themselves.
The
concept and idea of GAAR also came into the mind of politicians only to teach a
lesson perhaps to Vodafone or similar other business entities where the Supreme
Court exposed the hollowness of tax rules. But again the concept of GAAR got
miscarriage and Government of India was forced to abandon the concept in the
initial stage itself under the pressure of none other politicians who are
agents of some corporate houses.
To
avoid conflict among various ministers and various politicians associated with
various corporate houses, government instituted another committee to nullify
and postpone the introduction of General Anti Avoidance Rules. Black money or
foreign direct investment comes through small countries only to convert their
black money into white and to avoid tax payment.
Unfortunately
our country has become so much weak in the hands of dirty politicians that they
cannot imagine of avoiding FDI and cannot imagine of making stringent
Anti Tax Avoidance Rules like GAAR and cannot ensure compliance of rules in
true spirit.This is why, every time they come out with an idea of nailing
tax evaders they succumb and bow down under pressure of their own corporate
houses and mafias which nourishes election fund too.
I
therefore do not hesitate in saying that it is politicians who are allowing
foreigners or Indians Black Money masters to route their fund through countries
like Singapore or Malasia to invest in stock market and avoid tax payment
fully.
It
is politicians who guide corporate how to avoid tax payment and in return get
huge fund for elections.
It
is politicians who provide safety net to tax evaders by building pressure on IT
officials or ED officials or Custom officials to close the files of such tax
evaders and in return they are awarded by huge amount of money and stock.
It
is politicians who dilute the provisions of many laws to make it suitable to
business houses whom they like.
It
is politicians who are allowing Education Mafia and real estate builders to
sell their degree at exorbitant prices and sell their flats and commercial
space at exorbitant higher prices but accept money partly in black and partly
in white.
It
is politicians who are indirectly supporting sell of all products without bill
and transport the goods from "Delhi or Mumbai to any corner of the country
without paying sales tax or income tax or central sales tax. This is because
most of the politicians are themselves big businessmen.
It
is again politicians who build pressure on bank management for sanction of
loans to their kith and kin, relatives, friends and political supporters and it
is they who recommend for waiver or loan or for compromise settlement with
defaulters.
It
is again the politicians who willfully keep judiciary weak or select judges of
their choice who can postpone cases filed by tax departments or bankers to
recover their dues are postponed indefinitely
It
is possible only in India that politicians , Members of Parliament and Members
of State Assemblies or Heads of various Public Sector undertakings or High
ranked civil and police officials have
got no source or income or have very little source of income but have
accumulated wealth of hundreds of crores of rupees.
Who
will then cure the system and who will pass the proposed GAAR?
When
law makers are law violators and when law enforcing agencies are teaching tips
of tax evasion one cannot dream of success of any Anti Tax Avoidance rule, keep
apart GAAR to get planned success in real field of life.
Ramdeo
Baba or Team Anna will go on crying and crying against black money or against
corruption, nothing is going to happen positive in India as long as politicians
mend their style of living, style of functioning and their corrupt culture in
the name of democracy or in the name of secularism.
If
there is a will there is a way, it is an old proverb. But unfortunately in
India there is no will among politicians who rule the country to bring about
real reformation in the country. Politicians know the art of speaking and the
art of preaching sermons and hence they will continue to befool illiterate
dominated Indian population with the help of caste or communal card or the
quota card.
4 SEP, 2012, 07.31AM IST, RAM SAHGAL,ET BUREAU
Shome panel's GAAR recommendation fails to cheer stock markets as macro fears rule
MUMBAI: Stock investors were indifferent to the recommendation of the government-appointed Shome committee to defer a set of controversial tax avoidance rules by three years, as they focused on political turbulence amid policy inaction and lower growth forecast for the year.
Benchmark indices on Monday ended marginally lower to a one-month low also because investors judged that the optimism surrounding the postponement of theGeneral Anti-Avoidance Rules, or GAAR, had already been factored into stock prices.
"GAAR has been more or less discounted, which is why markets did not react to the Shome panel proposals," said Nirmal Jain, chairman, India Infoline. "Now, markets are confronted with and more concerned about dismal GDP numbers, multicrore scams and whether anything will be done to stimulate the economy."
Shome Committee's recommendations, a welcome shift on GAAR
Dinesh Kanabar
The Shome Committee Report seeks to address a number of concerns on general anti-avoidance rules (GAAR) and, thereby, mitigate the negative publicity India had received on this count. GAAR, initially sought to be introduced vide the Direct Taxes Code, was introduced a year early - as a possible response to some of the observations of the Supreme Court in the Vodafone case - the implementation was then deferred by a year as a result of all the negative publicity it got. Then, the Shome Committee was set up to hear the stakeholders and the committee has now recommended pushing implementation back by three years.
GAAR was introduced alongside the retrospective amendment of S9 seeking to tax overseas transfer of assets with underlying value in India. Together, they raised the fear that India has an aggressive tax administration that results in a proliferation of litigation; litigation is time-consuming; and, at the end of it if one succeeds, the law could be amended retrospectively.
The Shome Committee Report should be viewed as a first, but very important, step in the bridging of the trust deficit. The report, prepared after an extensive round of consultations, addresses several key issues:
It recognises the need for a consultative process and a buy-in of the key stakeholders, something that was absent when the provisions were introduced. Similar provisions introduced elsewhere in the world were after extensive deliberations.
It addresses a key issue of a need for transition. The report recommends grandfathering of the income arising from investments made prior to the GAAR regime as being covered by the earlier regime. The three-year deferment should be viewed in this light. It provides a window of opportunity to taxpayers to prepare and brace themselves for the new regime and to the tax regime to get trained to implement it.
It recognises the need to respect tax treaties; we have a right to review and renegotiate tax treaties but bypassing them through domestic legislation is not an appropriate way forward.
It brings out the important distinction between tax planning arising through legitimate choices available under the provisions of law and tax avoidance by resorting to circuitous transactions that have no commercial value and are only tax-driven.
It appreciates that choices made in real life are driven by commercial people; revenue, sitting in hindsight, needs to understand the commercial aspects and cannot impute tax avoidance. The recommendation of a five-member approving panel, including industry/professional representation, is a welcome, path-breaking one. It will considerably address the issue of trust deficit.
It provides examples of when GAAR will apply and when not and the consequences thereof. This will provide a basis of understanding and interpretation of various subjective terms and mitigate the vagaries of the subjectivity. Given that business realities and forms of transaction keep on changing, the list of illustrations will need to be updated on an ongoing basis.
Authorities will not 'rashly' implement retrospective tax rules, assures Chidambaram
This is the second time in less than a week that Chidambaram has given assurances of a stable and fair tax regime.
Terming payment of taxes as a 'mark of civilisation',Finance Minister P Chidambaram has assured that authorities will not "rashly" implement controversialretrospective tax rules while once again promising a non-adversarial tax regime for all taxpayers.
This is the second time in less than a week that Chidambaram has given assurances of a stable and fair tax regime, after the tax department attracted criticism for ushering in what some have called a "raid raj" and for introducing a series of measures industry and investors has slammed as retrograde.
At the heart of industry's unease with the tax policies are the General Anti-Avoidance Rules (GAAR) and an amendment to the tax laws that allows authorities to retrospectively levy taxes on all indirect transfers involving Indian assets. Faced with a backlash from industry and investors, the government has put the GAARproposal in deep freeze while it is yet to move ahead with implementing the retrospective tax provision.
Asked whether income-tax field officials had been given any instruction to issue tax notices to Vodafone or other such companies that face tax liability under the retrospective tax provisions, Chidambaram said the assessing officers would not act "rashly".
"I have not given any instruction to field officers... There is Section 119 (of the Income Tax Act), there is the Supreme Court judgement and there is opinion of attorney-general...," he told reporters.
Panel report helpful, says Chidambaram
All these have to be studied by the assessing officer and their supervisory officer. They are not going to act rashly. These are not small amounts on which you can take a rash decision. They will study all that," Chidambaram said.
The tax department's standoff with Vodafone Group Plc became the emblem of the retrospective tax issue after the authorities slapped a hefty tax demand on the British telecom company for its 2007 acquisition of Hutch-Essar, the Indian unit of Hong Kong's Hutchison Telecom. The companies in question argued that since the deal was executed overseas between two foreign entities, they did not have to pay taxes. But the tax department contended that the underlying asset was based in India and Vodafone should have deducted taxes before paying Hutchison.
The case went to the courts and the Supreme Court in January this year issued a judgement in Vodafone's favour. But former finance minister Pranab Mukherjee amended the Income Tax Act with retrospective effect to bring such overseas transactions involving underlying Indian assets into the tax net. However, tax authorities are yet to send any fresh communication to Vodafone to pay up the tax demand of Rs 11,218 crore
Shome Committee's recommendations, a welcome shift on GAAR
Dinesh Kanabar
The Shome Committee Report seeks to address a number of concerns on general anti-avoidance rules (GAAR) and, thereby, mitigate the negative publicity India had received on this count. GAAR, initially sought to be introduced vide the Direct Taxes Code, was introduced a year early - as a possible response to some of the observations of the Supreme Court in the Vodafone case - the implementation was then deferred by a year as a result of all the negative publicity it got. Then, the Shome Committee was set up to hear the stakeholders and the committee has now recommended pushing implementation back by three years.
GAAR was introduced alongside the retrospective amendment of S9 seeking to tax overseas transfer of assets with underlying value in India. Together, they raised the fear that India has an aggressive tax administration that results in a proliferation of litigation; litigation is time-consuming; and, at the end of it if one succeeds, the law could be amended retrospectively.
The Shome Committee Report should be viewed as a first, but very important, step in the bridging of the trust deficit. The report, prepared after an extensive round of consultations, addresses several key issues:
It recognises the need for a consultative process and a buy-in of the key stakeholders, something that was absent when the provisions were introduced. Similar provisions introduced elsewhere in the world were after extensive deliberations.
It addresses a key issue of a need for transition. The report recommends grandfathering of the income arising from investments made prior to the GAAR regime as being covered by the earlier regime. The three-year deferment should be viewed in this light. It provides a window of opportunity to taxpayers to prepare and brace themselves for the new regime and to the tax regime to get trained to implement it.
It recognises the need to respect tax treaties; we have a right to review and renegotiate tax treaties but bypassing them through domestic legislation is not an appropriate way forward.
It brings out the important distinction between tax planning arising through legitimate choices available under the provisions of law and tax avoidance by resorting to circuitous transactions that have no commercial value and are only tax-driven.
It appreciates that choices made in real life are driven by commercial people; revenue, sitting in hindsight, needs to understand the commercial aspects and cannot impute tax avoidance. The recommendation of a five-member approving panel, including industry/professional representation, is a welcome, path-breaking one. It will considerably address the issue of trust deficit.
It provides examples of when GAAR will apply and when not and the consequences thereof. This will provide a basis of understanding and interpretation of various subjective terms and mitigate the vagaries of the subjectivity. Given that business realities and forms of transaction keep on changing, the list of illustrations will need to be updated on an ongoing basis.
Authorities will not 'rashly' implement retrospective tax rules, assures Chidambaram
This is the second time in less than a week that Chidambaram has given assurances of a stable and fair tax regime.
Terming payment of taxes as a 'mark of civilisation',Finance Minister P Chidambaram has assured that authorities will not "rashly" implement controversialretrospective tax rules while once again promising a non-adversarial tax regime for all taxpayers.
This is the second time in less than a week that Chidambaram has given assurances of a stable and fair tax regime, after the tax department attracted criticism for ushering in what some have called a "raid raj" and for introducing a series of measures industry and investors has slammed as retrograde.
At the heart of industry's unease with the tax policies are the General Anti-Avoidance Rules (GAAR) and an amendment to the tax laws that allows authorities to retrospectively levy taxes on all indirect transfers involving Indian assets. Faced with a backlash from industry and investors, the government has put the GAARproposal in deep freeze while it is yet to move ahead with implementing the retrospective tax provision.
Asked whether income-tax field officials had been given any instruction to issue tax notices to Vodafone or other such companies that face tax liability under the retrospective tax provisions, Chidambaram said the assessing officers would not act "rashly".
"I have not given any instruction to field officers... There is Section 119 (of the Income Tax Act), there is the Supreme Court judgement and there is opinion of attorney-general...," he told reporters.
Panel report helpful, says Chidambaram
All these have to be studied by the assessing officer and their supervisory officer. They are not going to act rashly. These are not small amounts on which you can take a rash decision. They will study all that," Chidambaram said.
The tax department's standoff with Vodafone Group Plc became the emblem of the retrospective tax issue after the authorities slapped a hefty tax demand on the British telecom company for its 2007 acquisition of Hutch-Essar, the Indian unit of Hong Kong's Hutchison Telecom. The companies in question argued that since the deal was executed overseas between two foreign entities, they did not have to pay taxes. But the tax department contended that the underlying asset was based in India and Vodafone should have deducted taxes before paying Hutchison.
The case went to the courts and the Supreme Court in January this year issued a judgement in Vodafone's favour. But former finance minister Pranab Mukherjee amended the Income Tax Act with retrospective effect to bring such overseas transactions involving underlying Indian assets into the tax net. However, tax authorities are yet to send any fresh communication to Vodafone to pay up the tax demand of Rs 11,218 crore
This is the second time in less than a week that Chidambaram has given assurances of a stable and fair tax regime.
Terming payment of taxes as a 'mark of civilisation',Finance Minister P Chidambaram has assured that authorities will not "rashly" implement controversialretrospective tax rules while once again promising a non-adversarial tax regime for all taxpayers.
This is the second time in less than a week that Chidambaram has given assurances of a stable and fair tax regime, after the tax department attracted criticism for ushering in what some have called a "raid raj" and for introducing a series of measures industry and investors has slammed as retrograde.
Asked whether income-tax field officials had been given any instruction to issue tax notices to Vodafone or other such companies that face tax liability under the retrospective tax provisions, Chidambaram said the assessing officers would not act "rashly".
"I have not given any instruction to field officers... There is Section 119 (of the Income Tax Act), there is the Supreme Court judgement and there is opinion of attorney-general...," he told reporters.
Panel report helpful, says Chidambaram
All these have to be studied by the assessing officer and their supervisory officer. They are not going to act rashly. These are not small amounts on which you can take a rash decision. They will study all that," Chidambaram said.
The tax department's standoff with Vodafone Group Plc became the emblem of the retrospective tax issue after the authorities slapped a hefty tax demand on the British telecom company for its 2007 acquisition of Hutch-Essar, the Indian unit of Hong Kong's Hutchison Telecom. The companies in question argued that since the deal was executed overseas between two foreign entities, they did not have to pay taxes. But the tax department contended that the underlying asset was based in India and Vodafone should have deducted taxes before paying Hutchison.
The case went to the courts and the Supreme Court in January this year issued a judgement in Vodafone's favour. But former finance minister Pranab Mukherjee amended the Income Tax Act with retrospective effect to bring such overseas transactions involving underlying Indian assets into the tax net. However, tax authorities are yet to send any fresh communication to Vodafone to pay up the tax demand of Rs 11,218 crore
No comments:
Post a Comment