INDIAN GAAR - Need To Adopt Best Practices

Profession:Vaish Associates Advocates
 
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By Gautam Chopra, Principal Associate, Vaish Associates Advocates, Gurgaon Haryana, India

Domestic tax laws of countries generally contain specific anti-avoidance regulations, i.e. regulations which provide for disregarding of a transaction or any part thereof if the conditions specified in the regulations are met. Such examples in the Indian context include disallowance of loss in case of bonus/ dividend stripping transactions, prohibition on carry forward of losses in case of change in shareholding, giving loans and advances to closely held companies, clubbing of income of minors etc.

The rationale for an anti-avoidance law is to prevent taxpayers from taking unintended benefits of the provisions of tax laws. Over a period it has been felt that specific anti-avoidance regulations do not sufficiently meet the objective of preventing tax avoidance by taxpayers as taxpayers continue to find newer ways to obtain 'tax benefits'. As a result, a general overarching set of regulations seeking to prevent tax avoidance, better known as General Anti-Avoidance rules (GAAR), have been enacted in several countries across the world. The rationale for general anti-avoidance rules is that a transaction's primary driver should be commercial consideration and not tax reduction or avoidance.

In the past, even while GAAR has not been on the statute in India, Courts have, from time to time, invoked the 'substance vs. form' doctrine to disregard the transaction where the primary objective of the transaction has been found to be tax avoidance. A recent example of this is a decision of the Gujarat High Court in case of Vodafone Essar Ltd: [2011] 161 Comp Cas 144 (Guj). In this case, the Court declined to accord its approval to a scheme of reorganization under sections 391-394 of the Companies Act, 1956 since the Court was of the view that the transaction was, prima facie, designed to avoid tax.

GAAR- international experience

In the US, GAAR as part of the statute book was introduced in 2010. Prior to 2010, it was a doctrine, more commonly known as 'Economic Substance Doctrine' which the Courts applied to disregard certain transactions or certain steps in a transaction for tax purposes. The UK does not have a statutory GAAR. It has allowed the GAAR to be developed over a period of time through Court rulings based on again, the substance test.

Similar to proposed Indian GAAR [as contained in the proposed Direct Taxes Code (DTC)], Canadian GAAR gave sweeping powers to the Revenue...

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