General
Anti-Avoidance Rules (GAAR)
What are general anti-avoidance rules
(GAAR)?
These
rules, originally proposed in the Direct Taxes Code, are targeted at
arrangements or transactions made specifically to avoid taxes. The government
had decided to advance the introduction of GAAR and implement it from the
current financial year itself. More than 30 countries have introduced GAAR
provisions in their respective tax codes to check evasion.
What are the implications?
GAAR
allows tax authorities to call a business arrangement or a transaction
‘impermissible avoidance arrangement’ if they feel it has been primarily
entered into to avoid taxes.
Once an arrangement is
ruled ‘impermissible’ then the tax authorities can deny tax benefits. Most
aggressive tax avoidance arrangements would be under the risk of being termed
impermissible. The rule can apply on domestic as well as overseas transactions
.
What were the key concerns?
GAAR
is a very broadbased provision and can easily be applied to most tax-saving
arrangements. Many experts feel that the provision would give unbridled powers
to tax officers, allowing them to question any tax-saving deal.
Foreign institutional
investors are worried that their investments routed through Mauritius could
be denied tax benefits enjoyed by them under the Indo-Mauritius tax treaty. The
proposal had spooked stock market as FII inflows dropped on concerns, and the
rupee hit a low of `53.47 to the dollar.
What has the govt done now?
It
has postponed GAAR to the next financial year. This will give a breather to tax
payers and also allow the government time to frame clear rules after
consultations with stakeholders. The onus to prove that an arrangement is
‘impermissible’ will lie with the tax department. The GAAR panel, the final
body that will decide on the applicability of the law, will include an
independent member.
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