CHAPTER XI - GENERAL ANTI-AVOIDANCE RULE

1. Chapter XXIV of the Discussion Paper on the Direct Taxes Code (DTC) deals with the provisions of the General Anti Avoidance Rule (GAAR). The harmful effects of tax avoidance on the tax base, on tax equity and on the compliance regime have been discussed at length. The need for general anti avoidance provisions instead of legislative amendments to deal with specific instance of tax avoidance has also been discussed. The GAAR provisions apply where a taxpayer has entered into an arrangement, the main purpose of which is to obtain a tax benefit and such arrangement is entered or carried on in a manner not normally employed for bona-fide business purposes or is not at arm‟s length or abuses the provisions of the DTC or lacks economic substance. The Assessing Officer in accordance with the directions of Commissioner of Income Tax may in such cases determine the tax consequences for the assessee by disregarding the arrangement. These provisions have been further elaborated in the Discussion Paper.

1.1 Under the Code, the power to invoke GAAR is bestowed upon the Commissioner of Income- tax. For this purposes the Code empowers him to call for such information as may be necessary. He is also required to follow the principles of natural justice before declaring an arrangement as an impermissible avoidance arrangement. He will determine the tax consequences of such impermissible avoidance arrangement and issue necessary directions to the Assessing Officer for making appropriate adjustments. The directions issued by him will be binding on the Assessing Officer.

2. Apprehensions have been expressed that the GAAR provision is sweeping in nature and may be invoked by the Assessing Officer in a routine manner. Apprehensions have also been raised that there is no distinction between tax mitigation and tax avoidance as any arrangement to obtain a tax benefit may be considered as an impermissible avoidance arrangement. It has been represented that to avoid arbitrary application of the provisions, further legislative and administrative safeguards be provided. Besides suitable threshold limits for invoking GAAR should be considered.

3 GAAR legislation exists in a number of countries. Jurisdictions which do not have GAAR legislation impose significant additional information and disclosure requirements on tax practitioners regarding advance intimation and registration of tax shelters with the tax administration. These can be investigated and potentially abusive arrangements can be declared impermissible. A statutory GAAR can act as an effective deterrent and compliance tool against tax avoidance in an environment of moderate tax rates.

3.1 The proposed GAAR provisions do not envisage that every arrangement for tax mitigation would be liable to be classified as an impermissible avoidance arrangement. It is only in a case where the arrangement, besides obtaining a tax benefit for the assessee, is also covered by one of the four conditions i.e. it is not at arms length or it represents misuse or abuse of the provisions of the Code or it lacks commercial substance or it is entered or carried on in a manner not normally employed for bona-fide business purposes, the GAAR provisions would come into effect.

3.2 The following safeguards are also proposed for invoking GAAR provisions:-

i) The Central Board of Direct Taxes will issue guidelines to provide for the circumstances under which GAAR may be invoked.

ii) GAAR provisions will be invoked only in respect of an arrangement where tax avoidance is beyond a specified threshold limit.

iii) The forum of Dispute Resolution Panel (DRP) would be available where GAAR provisions are invoked. General Anti-Avoidance Rule targets arrangements lacking economic substance, permitting tax consequences to be adjusted when misuse or abuse is found. General Anti-Avoidance Rule covers arrangements aimed at obtaining a tax benefit that are not at arm's length, misuse Code provisions, lack commercial substance, or are not employed for bona fide business purposes; the Commissioner may require information, follow natural justice, declare arrangements impermissible, determine tax consequences by disregarding or recharacterising the arrangement, and issue binding directions to the Assessing Officer.