The new Committee to review the General Anti Avoidance Rule (GAAR) has to examine the concern about shifting the burden of proof on the tax payer. The Finance Minister (FM) declared that the burden has been shifted back to the Revenue in the amended law. Some of the economic newspapers have also accepted this proposition that the "burden of proof has been returned to the tax authorities". This treatise proposes to examine how far this proposition is true.
In the Budget of 2012-13, the Finance Minister proposed GAAR by incorporating Chapter X-A, containing Sections 95, 96, 97, 98, 99, 100, 101 and 102. In Section 96(2), the Finance Minster wanted to incorporate that "it shall be presumed that obtaining of tax benefit is the main purpose of an arrangement unless otherwise proved by the tax payer". It is this presumption which has invited most resistance on the ground, that the burden of proof that the transaction, is not sham has been thrown back to the tax payer. This is just the opposite of the accepted principle of burden of proof.
So the Finance Minister finally declared that he was amending the GAAR to remove the onus of proof entirely from the taxpayer to the Revenue. Let us examine what has been done in actuality by examining the exact words of the amended Section 96(2).
The present Section 96(2) is the following: "An arrangement shall be presumed to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain tax benefit".
It all depends on how we interpret the above Section. The language is very circuitous, to say the least. It makes a distinction between the expression 'arrangement' and 'whole arrangement'. It means that even if the whole arrangement is not designed to obtain a tax benefit, but only the arrangement (a step in or a part of such arrangement) is designed to obtain tax benefit, the Revenue will presume that the arrangement is for tax benefit and is, therefore, impermissible. So the first step is to prove that the main purpose of (a step in or a part of) the arrangement is to obtain a tax benefit. Who will first prove it is not explicit. It is not clear whose burden it is, the tax payer or the Revenue. By normal law, it is the Revenue who should prove it. But the Revenue can always discharge the burden by merely raising a few doubts or queries and thereby throw the burden back to the taxpayers. Shifting of the burden of proof is quite common and legal. If the taxpayer cannot discharge his burden of proof thereafter that even a part or step of the arrangement is not for tax benefit, the Revenue will make the "presumption" that the arrangement is for obtaining tax benefit. And this is in spite of the fact that the whole arrangement is not to obtain tax benefit. Therefore we find that the element of presumption is very much in the hands of the Revenue.
The first step is to be proved by the Revenue which is very easy since it has only to prove that a part of the arrangement or a step in the arrangement is doubtful. After that the burden shifts to the tax payer.
If he cannot discharge the burden, the overwhelming presumption is in favour of the Revenue. So the Section 96(2) of the Act, as it is worded now, has partially shifted the burden to the Revenue and not fully.
As a matter of fact, if it is shifted fully to the Revenue, it ceases to be a GAAR. It was always on the Revenue before the GAAR was conceived in the last Budget.
If a GAAR is made with a hundred percent burden of proof on the Revenue, then it is no GAAR at all. My suggestion to the new Committee is that the circuitous language of Section 96(2) should be replaced by transparent language indicating which part of the burden will be discharged by the Revenue and the tax payer. The distinction between "arrangement" and "whole arrangement" should be avoided.