The Centre has reiterated that the General Anti Avoidance Rules – aimed at curbing tax avoidance – will come into force on April 1, ignoring industry’s suggestion to defer the rules on account of uncertainty over their applicability and to provide adequate time to prepare for the new regime.
What are GAAR?
General anti-avoidance rule (GAAR) is an anti-tax avoidance Rule of India. It is framed by the Department of Revenue under the Ministry of Finance. Originally proposed in the Direct taxes code 2009,are targeted at arrangement or transactions made specifically to avoid taxes.
Why GAAR were discussed for the first time?
In 2007, Vodafone entered the Indian market by buying Hutchison Essar. The deal took place in Cayman Islands. The Indian government claimed over US$2 billion were lost in taxes. In September 2007, a notice was sent to Vodafone. Vodafone claimed that the transaction was not taxable as it was between two foreign firms. The government claimed that the deal was taxable as the underlying assets involved were located in India.
Further issues while implementing GAAR
1. LOB clause clarity
Limitation of Benefits (LOB) clause argues that if an organization does not undertake tax avoidance on account of controversial transaction , then provisions of GAAR will not apply. Government has decided to incorporate LOB clause in new GAAR rules.
2. Another positive thing is that court-approved arrangements are outside the purview of GAAR. The official clarification also said that, if at the time of sanctioning an arrangement, the court had explicitly and adequately considered the tax implications, then GAAR would not apply to such an arrangement.
GAAR provisions still not clear
While these clarifications are expected to bring about some certainty to GAAR issues, experts said believe that some doubts would still remain primarily because of the subjectivity inherent in GAAR.