Just around the corner?

General Anti Avoidance Rules, or GAAR, is a broad set of rules empowering the revenue authority to examine an arrangement and to disregard it if it is found to have been entered into with the main object of obtaining tax benefit and has features such as non-arm’s length dealing, abuse or misuse of tax law and lacking in substance or bona fides. It is anticipated that the recent Vodafone ruling, among other factors, may prod the government to hasten the introduction of India’s legislative GAAR. Concern has been expressed on the unduly wide scope of GAAR provisions originally proposed in the Direct Taxes Code Bill. It is feared that the enactment of these provisions may create uncertainty about tax implications of many business and non-business arrangements and generate litigation.

Could we take cue from the GAAR Report in the UK, which has suggested that a broad spectrum GAAR may not be in UK’s economic interest? The moot question being whether India is ready for legislative GAAR or it is better instead to expand the scope of specific anti-avoidance rules or GAAR should be introduced in phases.

Assuming GAAR indeed needs to arrive, the question is what should be its form. For sure, the proposed version needs to be finetuned, as regards both substantive and procedural aspects. Could we gain from the evolution process GAAR provisions have undergone in other countries?

Learning from global experience could help us get a more acceptable version of GAAR. Of critical import would be resolving issues like whether it is a taboo to make a structure tax efficient. Could the initial burden of establishing tax avoidance rest on revenue instead of the taxpayer? Can the option of setting up an advisory panel to administer GAAR be explored? To instil certainty, could the remit of Authority for Advance Rulings be expanded to include GAAR? Would GAAR apply prospectively? Would the government, periodically publish lists of arrangements that are GAAR prone? Stakeholders would definitely want to see a more matured and balanced GAAR regime.

Saurav Bhattacharya & Richa Sawhney
Associate Director and Senior Manager (Direct Tax), PwC India