General Anti-Avoidance Rules (GAAR)

India has sought to address the issues relating to tax avoidance and evasion by bringing in General Anti-Avoidance Rules (GAAR) in addition to various transaction-specific Special Anti-Avoidance provisions.

The introduction of GAAR recognizes that it may not always be feasible for the judiciary to address the unforeseen implications of transactions carried out for tax purposes and also the need to provide some semblance on the matter of tax avoidance. However, given the inherent challenge and the subjective nature of GAAR, if not appropriately implemented, it may affect business sentiment and deter foreign investors. Considering the goal of any anti-avoidance legislation, viz, targeted attack on tax avoidance arrangements without creating undue hardship for genuine and honest taxpayers, India would need to address the issue in the proper perspective so that the provisions and their implementation do not become a law unto themselves.

Effective in India from 1 April 2017, almost eight years after it was first introduced in the then proposed Direct Taxes Code Bill (DTC), 2009. The approach of the government in the entire process of introduction of GAAR has been consultative, which is quite appreciable. Amendments have been made in the GAAR provisions to address the concerns of the stakeholders. Safeguards have been incorporated to ensure that GAAR provisions are not misused. The requirement that GAAR will be invoked only after obtaining permission from the Approving Panel is commendable and shows the intention of the Government to ensure judicious implementation. Monetary threshold has also been provided to target only high value arrangements. Investments made up to 31 March 2017, have been grandfathered. Clarifications have also been provided on various issues raised by the stakeholders.

For taxpayers, it will be imperative to examine their existing arrangements to evaluate if they may fall within the boundary of being considered as impermissible avoidance arrangements and thereby hit by the consequences provided in the GAAR provisions, which can be quite onerous. This exercise may also help them take corrective actions to mitigate the said exposure.

Read the Deloitte India report for a well-rounded view about GAAR, India and international experience.