Introduction of General Anti-Avoidance Rule or “GAAR”, as popularly called, has been one of the most controversial amendments in the Income-tax Act, 1961 which has come in the Union Budget of 2012.The substantive provisions of GAAR, applicable from 1st April, 2013 are contained in Chapter X-A of the Income-tax Act, 1961, which comprises Section 95 to 102. Indian tax legislation has heavily relied on Specific Anti-Avoidance Rules (“SAAR”) to target abuse of selective tax provisions. However for cases, not covered under SAAR, the revenue has relied on jurisprudence which several times have favored form over substance. The Indian GAAR provisions, based on the South African GAAR are a codification of substance over form approach.
The GAAR provisions as introduced in the Finance Bill, 2012 were draconian and were a potent weapon in the hands of the revenue authorities. However, to revive FII’s investment, stem rupee depreciation and stimulate economic activity, some welcome changes were proposed to the original enactments, primary of them being, postponing the applicability of GAAR to the next year, allowing assesses to go for Advance Rulings and putting the onus on the Revenue. Thereafter on 28th June, 2012, draft guidelines were issued and placed for public discussion. The guidelines, through various examples, clarify that the intent of the revenue is to target tax evasion and tax avoidance. Tax mitigation would be outside the purview of GAAR. Other positives being proposal to provide monetary threshold beyond which GAAR would be invoked and limitation of tax consequences to only that part of the arrangement which is impermissible. Another encouraging clarification was that GAAR would not be applied to the FIIs in case they don’t take recourse to the any treaty. Also, in no case it would apply to their investors. The guidelines however fall short in allaying fear in the minds of investors that overzealous Revenue authorities may use GAAR and go after even legitimate commercial transactions in order to meet revenue targets.
While, the report of the Shome Committee is awaited after taking views of various stakeholders, one can only hope that a collaborative consultation approach is followed as envisaged in the UK GAAR. UK also clearly understands that a wide anti-avoidance rule may compromise the certainty which is necessary to provide the confidence to do business in India. It’s imperative that the Indian government also works towards providing greater certainty in doing business in India.
The author is Partner: Tax & Regulatory, Ashok Maheshwary & Associates.