GAAR is a set of broad rules introduced by the Indian government to prevent tax avoidance. It allows tax authorities to deny tax benefits from "impermissible avoidance arrangements" that lack commercial purpose or result in a misuse of tax treaty provisions. While aimed at stopping abusive tax avoidance, critics argue GAAR gives too much power to tax authorities and could discourage foreign investment if applied arbitrarily. The Shome Committee recommended safeguards like monetary thresholds and appeals processes before GAAR is invoked to address these concerns. Overall, GAAR remains a controversial but important measure for curbing tax avoidance so long as it is implemented judiciously.

1. OVERVIEW ON GENERAL ANTI
AVOIDANCE RULE (GAAR)
R.Pushkar

2. WHAT IS GAAR?
 GAAR is a set of broad rules which are based on general
principles to check the potential avoidance of the tax in
general
 Example
 Lord Tomlin- “Every man is entitled to order his affairs
so that the tax attaching under the appropriate Acts is less
than it otherwise would be”
 –(IRC v. Duke of Westminster)
 Why GAAR?
 Doctrine of “substance over form”

3. HISTORY
 In IRC v Duke of Westminster it was held that it is the
taxpayer‟s legal right to attract least amount of tax and it
will construe a situation of tax avoidance.
 The Westminster principle (1936) was that any tax avoidance
scheme or device is okay so long as it is not illegal. NOT
Applicable in India.
 In McDowell & Co. V. CTO it was held that tax
avoidance is bad and illegal.
 In Union of India v. Azadi Bachao Andodal held that
tax avoidance is valid and legally right provided that the
scheme is within the parameters of law.

4. TERMS
 Tax Havens are countries which have low tax regimes. Nearly
45 Tax Havens.
 Bilateral Investment Protection Agreement
India has signed BIPAs with 82 countries out of which 72
BIPAs have already come into force.
 Participatory notes - 1992- Investors need not register under
SEBI.
 Difference between Tax Planning- Tax Evasion- Tax Avoidance
 Impermissible avoidance arrangement (IAA)
 Creates rights, or obligations at arm‟s length.
 Results in the misuse of provisions of the Code.
 Lacks commercial substance.
 Entered into arrangements which would not normally be employed
for bona fide purposes.

5. GAAR IN INDIA
 Vodafone Case
 11,000 cr – Bombay HC – Appeal to SC
 Direct Tax Code, 2010
 Finance Bill, 2012
 S.90 and S.90A - tax residency certificate has no significance -
Amendment had questioned the validity of the certificate, the
law of the land and verification for “bonafide substance” of the
residency.
 S.95-102 of the Act provides the definition and conditions of
IAA and powers of the authorites.

6. RECOMMENDATION MADE BY SHOME
COMMITTEE
 The following recommendations will apply irrespective of
prospective or retrospective application :
 Intermediaries between the foreign company and assets in India
may be ignored to arrive at the valuation of shares of a foreign
company
 Taxation restricted only to capital gains attributable to assets in
India
 Provisions not clarificatory in nature

7. RECOMMENDATION MADE BY SHOME
COMMITTEE
 The assessing officer (AO) will be required to issue a show cause
notice, containing reasons, to the assessee before invoking the GAAR
provisions and reference has to be made to CIT for invoking GAAR.
 The assessee shall have an opportunity to prove that the arrangement is
not an IAA.
 GAAR Approving Panel (AP)would now include an expert member on
matters such as direct taxes, business accounts and international trade
practices.
 The directions issued by the Panel shall be binding on the assessee as well
as the income-tax authorities.
 Same income will not be taxed twice in the hands of the same taxpayer
 Investments made before August 30, 2010, the date of introduction of the
DTC Bill, 2010, will be grandfathered.
 GAAR will not apply to such FIIs that choose not to take any benefit
under tax treaties.
 A monetary threshold of Rs 3 crore of tax benefit in the arrangement will
be provided.

8. SCOPE AND IMPACT
 The main target is to stop the avoidance transaction.
 The companies that has to pay tax above the monetary
threshold value.
 The scope has been extended to non-resident tax payers
instead of FII‟s only.
 It gives sweeping powers to tax authorities.
 No persecution of genuine foreign investors
 The shadow of black money- „round tripping‟

9. IMPACT ON STOCK MARKET

10. GAAR WORLD WIDE
 CANADA:
 Copthorne Holdings Ltd. v. Canada, 2011 SCC 63
(1) was there a tax benefit;
(2) was the transaction giving rise to the tax benefit an avoidance
transaction; and
(3) was the avoidance transaction giving rise to the tax benefit abusive.
AUSTRALIA
 Part IVA of Income Tax Assessment Act 1936
(1) there must be a „scheme‟,
(2) there must be a „tax benefit‟ obtained in connection with the
scheme, and
(iii) it must be reasonable to conclude that at least one person
entering into the scheme did so for the „sole or dominant
purpose‟ of obtaining a tax benefit

11. GAAR WORLD WIDE
Penalities
Penalty of 25% (lack of reasonable care),
50% (recklessness) or
75% (intentional disregard of a taxation law)
 CHINA
 Circulars 698, 601(at limiting the abuse of double tax
treaties), 124(administrative rules for treaty residents), Article 123 (arrangement
without commercial substance)of Chinese Corporate Income Tax law
 UK
• Targeted Anti-avoidance Rules (TAAR) and
• Disclosure of Tax Avoidance Schemes (DOTAS)
 USA
• Sec 7701(o) of Internal Revenue Code 1986
• Economic substance doctrine – Business Purpose Test

12. PROS CONS
 Training of tax officers  Larger power to tax
authorities which leads to
arbitrary actions - CIT
 Detailed report of reasons
 SAAR will apply over GAAR
 The onus lies on the assesse
 Monetary Threshold that there was no IAA.
 Override treaties entered into
 No discrimination by India.
 Serious institutional failure
 Increases the GDP of judiciary.
 It is premature to use GAAR
in India unless tax officers
are trained are fairly
aggressive in targeting
genuine transactions

13. CONCLUSION
 The Finance Minister deferred the implementation of GAAR to
April 2016 instead of the erstwhile timeline of April 2013.
 There can be no doubt about the need to put an end to tax
evasion and avoidance. However, that should not be done
in a way that would frighten off investors.
 Need for enactment of a clear and viable GAAR to send a
clear message to investors.
 The GAAR provisions are like a double-edged sword and
would need to be judicially invoked by the revenue
authorities.
 If not GAAR I would suggest that necessary amendments
has to be made in the DTAA and Income TAX Act.

14. THANK YOU