Taxation Law Assignment: Critical Discussion on GAAR Provisions
Task: Write a taxation law assignment on the topic - GAAR Provisions and Antecedent to Domestic Law. The essay should highlight how Introduction of GAAR(India) provisons has provided a support or made the present Anti- avoidance domestic laws better in comparitive analysis with the GAAR provisons in United Kingdom.
Introduction: GAAR refers to the General Anti-Avoidance Rule which is implemented in India from the first of April, 2017. This taxation law assignmentwill reflect all the details of GAAR provisions, importance, role, purpose etc. and will also explain in detail analysis about the provisions of the United Kingdom.
GAAR in India: The GAAR provision is included in the income tax act of 1961 . In the 2012 Finance Act, the concept of General Anti-Avoidance Rule was first introduced in the Financial Budget by Pranab Mukherjee who was then the Finance Minister and it was approved by the President. The provisions of GAAR are referred to in sections 95 to 102 under X-A in the chapters of the Act and are regarded as a code in itself. The Revenue Department under the Ministry of Finance makes the rules that are included under the General Anti-Avoidance Rule. GAAR's first proposal was adopted in the 2009 Direct Tax Code. However, GAAR was later introduced in 2012 in the budget session of the Indian Parliament. General Anti-Avoidance Rule is specifically formulated to reduce the loss of revenue caused by the aggressive tax avoidance system executed by the company. It is effective in 2017 and is applied from the 2018-19 assessment year.
The chapter has its own section of definition where the provisions related to that chapter will be applicable . All 12 terms are defined under section 102, of which two will be most effective in understanding the existing provisions:
1. Arrangement: The term"Arrangement" means any operation, transaction, agreement, scheme, or any step of agreement, or part or all, applicable or not, and including the separation of any property in kind of operation, transaction, agreement, scheme;
11. Tax benefit means:
Taxes or other amounts payable under this act are avoided or suspended or reduced; or
This act makes it possible to increase tax or other refunds; or
Decrease in total income with an increase in loss in any previous year as well as the relevant previous year.
Reasons for GAAR:
Several countries have enacted anti-avoidance laws related to taxes to varying degrees .
In 1981, an anti-avoidance law was enacted in Australia.
GAAR was launched in India after the Vodafone deal with Hutchison-Acer. The treaty was signed in the Cayman Islands.
According to the government, the tax loss was over 2 billion USD.
In the next case, the Supreme Court ruled with the aid of Vodafone.
The Vodafone Case: In the case of Vodafone International Holdings BV v. Indian Union, Hutchinson International which is known as the non-resident company owns a 100% stake in CGP Investment Holdings Limited which was 67% owned by Indian company Hutchinson-Acer . The important question that came to the fore was whether the income accrued to Hutchinson as a result related to the transaction could be considered as accumulated or generated in India on the basis of the Income-tax Act S.9. The Department of Income Tax has issued a notice of show cause to Vodafone on why it will not take action against Hutch for failing to deduct withholding tax under IT Act S.195. Before the Bombay High Court Vodafone challenged the show-cause notice validity in a writ petition. The High Court had ruled that the writ petition that challenges the notice of show cause was premature as the appellant had an alternative remedy. Vodafone then appealed to the Supreme Court. In the immediate case, without a doubt, the decision was made to transfer CGP shares offshore. Both companies were offshore, not in India. Both companies are not entitled to any income or revenue assets in India, excluding the question of relocation, those revenue assets in India. Tax existence must be seen in the context of the transaction in question as well as not in the context of a completely irrelevant transaction. In the eyes of the public, Section 195 will only apply if it is paid from one resident to another non-resident and will never be applicable between two non-residents outside the Indian territory. In the present case, the transaction is executed and enforced between two non-resident subsistence with the help of an agreement that is executed outside India.
India's underlying assets have nothing to do with that transaction. To establish a relationship, the legal transaction nature must be tested while indirect transfer regarding the rights as well as entitlements to India is not possible. As a result, according to the law, Vodafone is not obstructed in responding to a Section 163 notice that deals with the conduct of a property buyer as a representative appraiser. The Vodafone case, therefore, can be cited as the best case for tax evasion in the four corners of the law, which is recognized as the savior of the company from falling into the tax trap of an improper amount of 12,000 cores, that would otherwise have dismissed the company.
Tax Evasion, Tax Avoidance and Tax Planning:
Tax evasion refers to the situation when a person or entity denies to pay the arrears of tax to the government. It is a completely illegal and punishable offence. GAAR doesn't apply to tax evasion.
Tax avoidance is a way for companies to avoid tax evasion through legal action. Tax evasion is not illegal. For an instance, if a salaried employee invests a portion of his or her earnings in certain funds, he or she can be called a tax evader. GAAR will apply for the avoidance of unacceptable taxes .
When large corporations are able to avoid aggressive taxes, the government faces a huge revenue loss.
GAAR specifically opposes all transactions where the key purpose is to avoid taxes.
Tax planning is a method by which available financial incentives are used to look at different tax options and to determine whether, when and how to operate personal as well as personal transactions in order to eliminate or reduce taxes. The application of GAAR may or may not be in this case.
Milestones of GAAR:
16th March 2012: Finance Minister Pranab Mukherjee reached a tough decision as well as announced that the government would be keen to control effective tax avoidance from the 2012-13 fiscal year.
7th May 2012: Finance Minister Pranab Mukherjee was forced to reverse his decision and he postponed GAAR for a year. Because his decision regarding GAAR showed fear of foreign investment.
28th June 2012: The Ministry of Finance released the first draft of the General Anti-Avoidance Rule, the provisions were widely criticized.
14th July 2012: The Prime Minister, Manmohan Singh, constituted a review committee under ParthasarathyShome for the purpose of preparing the second draft of GAAR by 31st August as well as to publish the final guidelines by the end of September 2012.
1st September 2012: The Shome Committee recommends that GAAR be postponed for three years.
14th January 2013: The Government of India, after considering the recommendations of the Shome Committee, came to the conclusion that GAAR should be postponed for two years and accordingly, it should be implemented from 2016-17.
27th September 2013: In India, GAAR will be valid for foreign investors who have not availed of a contract under Section 90 or Section 90A of the I-T Act or the Double Taxation Avoidance Agreement (DTAA) as per the notification issued by the Government.
It was decided that GAAR would not apply to investments performed by foreign institutional investors before August 2010.
The GAAR provisions are said to be effective from 1st April 2017 and will only apply to business systems with tax benefits of over Rs. 3 crores.
ParthasarathiShome Panel Recommendations:
1. GAAR implementation was postponed for three years.
2. With the change in the Income Tax Rules of 1962, the tax threshold facilities were Rs. 3 crore and above.
3. Mauritius Issue- General Anti-Avoidance Rule should not apply for a fact inspection of Residency FII from Mauritius. The Government should keep the Central Board of Direct Taxes (CBDT) Circular provisions issued in 2000 regarding the adoption of the Tax Residence Certificate (TRC) implemented by the Mauritius government .
4. The Approving Panel is an association of five members, two members of which must be private individuals and have a reputation in the fields of business, economics or accounting.
5. The other two members of the association must be the chief commissioner of the Income Tax department, presided over by a retired HC judge.
Examples of GAAR provisions:
1. A company may choose to purchase a property and lease that property. The company will demand a deduction to lease rent instead of devaluation if they are the owner of the assets. Lease rent will not be allowed as a cost under GAAR
Explanation: The GAAR provisions, primarily, do not apply to lease decisions (as opposed to the purchase of an asset). However, in the case of circular leasing, i.e. if an asset is leased by the taxpayer and through various sub-leases, it is returned to the lease, thus the creation of a tax benefit from unchanging the economic component, the revenue of GAAR will examine the matter for invoking provisions.
2. Suppose "X" is considered to be a company that borrows some money from "Y" and spends to buy shares in three fully subsidiary companies under company "X". If the fair market value of the shares was twenty rupees, then "X" has to be paid one twenty rupees per share. The said subsidiary companies received the amount was transferred back to another company affiliated with "Y". "X" was sold the mentioned shares at Rs. 4 each, a short-term loss of capital was asserted and later it was launched against other capital gains for a long period.
Explanation: Through the above arrangement, the taxpayer is able to enjoy a tax benefit and make obligations and rights also. These obligations and rights are not usually created by people who work at a distance that discourages personal communication. Revenue will appeal to GAAR about this arrangement.
Sham Doctrine: Applicable by the court in case the element of a transaction as desired by the parties is not able to be represented properly by the documentation, for example, the obligations and rights explicitly made discord from the objectives set by the parties.
Substance Over Form: Courts focus on the economic or monetary nature of a transaction rather than the legal implications of the transaction for the purpose of determining the transaction tax outcomes.
Step Transaction: The transactions that have the sole purpose of avoiding taxes as well as engaging a group of lawfully invalid actions are taxed based on their final outcome, thus ignoring the intervention.
Business Purpose: Transactions need to be examined for the purpose of real business or for legal non-tax objectives, such as when transactions are motivated by a desire to reduce or avoid taxes. Transactions are largely ignored if they are motivated by the intention to reduce or avoid taxes.
GAAR invoking procedure:
The Assessing Officer creates a reference regarding a potential General Anti-Avoidance Rule (GAAR) case to the Tax Commissioner.
After the Commissioner of Income-tax has issued a notice to the taxpayer for the confirmation that the measure is an IAA (Impermissible Avoidance Arrangement).
Then the taxpayer files a document that indicates that the system is not Impermissible Avoidance Arrangement (IAA).
In case the Income Tax Commissioner is dissatisfied with the interpretation, he can refer the matter to the Approval Panel.
The panel intervened to investigate the case and provide directions that apply to tax authorities and the taxpayer.
Then, the taxpayer was given an order by the Assessing Officer.
Anti-tax avoidance rules are difficult to enforce because it is not easy to distinguish among various kinds of avoidance exercises.
The line of distinction between an offensive and an approved avoidance is so thin that it becomes difficult to distinguish.
Another disadvantage is that it is a very strict law.
It is also feared that tax officials could use the law to harass people.
Comparative analysis of General Anti Abuse Rule guidance UK: An anti-evidence rule is a kind of management (GAAR) that is primarily governed by a country's revenue authority. In this system, denial of tax benefits is recognized on the basis of certain criteria. Its purpose is nothing more than to gain tax benefits. The Anti-Avoidance Rules (GAARs) are essentially a process that prevents tax evasion, which is limited in many jurisdictions . Both the United Kingdom and Australia are under its jurisdiction. However, due to its complex and dynamic nature, GAAR identifies and analyzes tax evasion through a variety of processes, although similar in many respects. In the case of GAAR, the history of Australia is said to be much older than the history of the United Kingdom. This suggests that the UK's GAAR had the opportunity to draw on Australian history as the Australian GAAR is much older. The various concepts and implementations of GAARs will be discussed. It will discuss in detail the GAAR system in the UK and show how the impact of Australian GAAR affects the UK GAAR has also been described. Background: The most important thing to know about all the rules and regulations of UK GAAR is to understand its background. The preparation of the UK GAAR required considerable consideration, whether the UK needed a separate GAAR in spite of the Australian GAAR at all, and, if necessary, what kind of background GAAR would be most effective. This background was prepared in terms of two different time periods, one is the management of GAAR till 1998 and the other is the current period from the period following the adoption of GAAR. Tax evasion schemes were originally introduced through the Ramsay method. This Ramsay was actually a response to the Duke of Westminster 3 and IRC cases, where Tomlin made some special statements.
The Duke of Westminster case: "Subject matter" is an important factor in the legal situation, and the point is that some or all of their salaries will be paid to the Duke, and the Duke will receive it . Since a certain amount of money will be paid, it will be considered as wages. At some point, this supposed doctrine was largely postponed due to misunderstanding. There is a need to resolve this misunderstanding as soon as possible. This will benefit everyone. This is because this doctrine is considered uncertain for the wisdom of the law. This did not seem to be anything more than a matter of money to Tomlin. Although it was not mandatory and actually illegal, it had its implementation.
In general, there is a lot of practice and a lot of feedback on the tax evasion schemes that the promoters bought. These schemes contain a specific series of transactions that, although initially seemingly separate, were actually connected. Their only objective was to avoid tax through cooperation with each other. The Duke of Westminster gave the freedom of every human being to transact money Acknowledgment, which will later make it clear that the transaction was real. In other words, legal status is a means by which transactions could be understood as separate or connected. Also, according to Lord Tomlin's statement, the substance has been removed and the segregation of transactions has been improved.
The Ramsay approach: The Ramsay method essentially contradicted conventional management. They said that all transactions that were automatically cancelled could be tax-exempt on one condition if the transactions were found to be pre-determined. The Ramsay method typically incorporates objective application and explains compound transactions and individual transactions. This created judicial chaos that could not have been avoided, and as a result, a separate GAAR system was required in the UK. The Ramsay method was not the only UK anti-evidence mechanism, Reliance was also an anti-evidence mechanism. The extent to which GAAR will affect the UK was thoroughly considered in the judgment. In 1997, it was realized that SAAR should be continued, and this was ordered by the Tax Law Review Committee. The big question was how effective and exactly how SAAR would affect GAAR. In this context, the TLRC said that it is very important for the taxpayers and the right framework for their protection. It pays special attention to the protection of taxpayers through anti-evidences provisions. Significant changes in the country's internal revenue system have resulted from the implementation of this GAAR, which is part of the anti-avoidance rule. Although some limits are drawn on tax evasion, according to Ramsay, the use of new devices plays a vital role. It is considered by the country's internal revenue authorities that the UK is one of the few developed cities in the world to have such a statute and the country in which tax evasion had to be suspended. TLRC, Revenue system and implementation of UK GAAR: Domestic internal revenue systems such as the TLRC also recognize the need for GAAR to reduce the UK's regular tax avoidance . Both the Revenue System and the TLRC agree that the tax should be levied on those who are evading taxes and that traders who regularly do business with taxes should not be unduly embarrassed. The Revenue System further states that all tax-compliant companies that do not have a tax-compliant transaction should be investigated. This means that the domestic revenue system wanted a balanced GAAR system where not only tax evaders would be penalized, but also those who are real taxpayers should be considered for protection and justice.
The UK GAAR was launched in 2013 by maintaining specific processes. This is described in Part 5A of the UK Finance Act 2013. Sections ° 206(1) and ° 206(2) describe all the rules and regulations of this GAAR. Section ° 207(1) describes the urgency of paying business tax. Section ° 207(2) deals with the penalty of tax evasion. According to the UK GAAR, this system can be composite or multi-step. It can also be part of a broader system. According to section ° 207 (3), it is a targeted system and highly effective in multi-step formatting. GAAR's implementation in the UK was able to bring about a radical change in the revenue system.
Understanding the role and importance of GAAR provisions:
The rules of GAAR were promulgated in September 2013 by the Central Board of Direct Taxes. The GAAR is implied to India under income tax. In 2013, some changes were made through the Finance Act as per the recommendation of the Shome Committee. GAAR has some features,
Purpose: GAAR is usually applied in case of tax avoidance. This is why its main purpose is to identify the persons who avoid the tax. GAAR is not objective at all, the main purpose of those who pay taxes should know the main purpose. Traders should do any work after verifying its main objective. Taxpayers must know that business reasons outweigh tax reasons.
Tainted elements: The tainted element is another important issue that taxpayers should be aware of. There are certain tests that GAAR is applied to if someone matches them-
1. When there is a lot of distance between the two parties to the transaction.
2. When there is a lack of bonafide in the transaction.
3. When the IT Act provision is violated in the transaction.
4. When there is no proper commercial substance.
GAAR VS SAAR: Specific Anti-Evidence Rules (SAARs) work under the IT Act, and they only work in certain cases of tax evasion. According to the law of India, specific provisions get more recognition than general provisions. In case of their dispute, the court dismissed the general provision. In this case, GAAR says, the tax liability is mandatory in any case. According to the Shome committee, in all cases where SAAR is operating, GAAR will not be able to intervene in any way. However, according to the Government of India, GAAR and SAAR may work together if necessary, but the implementation will be anyone rule.<
GAAR and treaty: In this case, it is said that in the case where GAAR will be applied, the taxpayer of that case will not get any benefit from the tax treaty. If a party has already received some of the benefits of the tax treaty, and the GAAR is subsequently applied, the beneficiary must return that benefit, including royalty. According to the Indo-Singapore tax treaty, there are anti-evasion rules in the case of LoB. If the LoB fails in any case, then the Government of India will have to take all the responsibility and GAAR will have no role here.
Applicability to investments: All transactions that occurred before August 30, 2010, will be subject to non-aggression, as the Direct Tax Code Bill was passed in 2010. If similar transactions occur after 2010, they will be subject to GAAR. Before August 30, 2010, India had tax treaties with Singapore, Mauritius, Cyprus, etc., and there was no GAAR intervention, but then, after 2010, the tax treaties have been made in every field of GAAR's implementation. In all of these cases, the interest rates would have been under GAAR.
Advance ruling: According to the rules of GAAR, taxpayers will get the power of ruling in advance if they transfer their case to GAAR. The key of these rulings is the AAR, the Advance Ruling Authority. Although GAAR is not able to provide any immunity before April 1, 2015, anyone can apply for AAR after March 31, 2014, if they want. Considering the number of applications pending under AAR, it is almost impossible to be successful before December 2014, because MNC had only limited time till 2015.
Safe harbours: According to the current provision, the only safe harbour is the monetary threshold. According to the rules, GAAR intervenes if a party makes a profit of Rs 3 crore or more in all the transactions at the end of the year. In this case, the rate of corporate tax is 30 per cent. This is a very low-value transaction. This is why the Shome committee says that the amount of tax should be determined considering the value of the money at that time. Then the shortfalls can be overcome effortlessly. Although there is no Thin Cap Rule in India taxpayers can pay through debt. or other means. The tax officer should also remain silent in this case.
Tax authorities: Like the revenue authority, the tax authority has a lot of power, through which they can nullify the benefits of paying taxes. One of these benefits is disobeying the entity, collecting receipts, and paying the same amount of debt. There is no Thin Cap Rule in India, yet the power to recharacterize debt is provided, which is really great. However, GAAR will only be applied when the person has sufficient doubts about the belief. Another safeguard is that under the GAAR panel there is a judge, a scholar and also an income tax officer whose joint effort solves a case. The taxpayer must obey their joint order.
Compensatory adjustment: It states that if a particular party calls the GAAR, the GAAR will be unable to meet the compensatory adjustment of the other party. For example, if Company A makes interest payments to Company B, then if GAAR intervenes, the payments will be reapplied as dividends. In that case Company, A has to pay dividend tax and pay at the same time. However, it is important to note that a taxpayer does not have to pay tax repeatedly for the same income.
GAAR on FIIS: According to the rules, GAAR will not be applicable in any way if SEBI is associated with FII. In essence, the budget 2013 and some changes in the GAAR rules indicate some of the issues that stakeholders have been waiting for. However, a number of issues still need to be addressed. If a business entity fails to characterize its main purpose, and also fails the supplementary test, MNC will have to re-form the entity in that case.
Conclusion: Although the implementation of GAAR has resulted in huge changes in the tax system, it can be said that in some cases there is still a lack of a proper system. One of them is the application of MNC, although it does not apply in all cases. However, as per the overall analysis ontaxation law assignment, it is considered to be one of the most important provisions of the tax system in India today.
1 Sidney C.M. Leung, Grant Richardson and Grantley Taylor, 'The Effect Of The General Anti-Avoidance Rule On Corporate Tax Avoidance In China' (2019) 15 Journal of Contemporary Accounting & Economics.https://doi.org/10.1016/j.jcae.2018.12.005
2 'Tax Avoidance: General Anti-Abuse Rule' (GOV.UK, 2014)
3 'Interpretation And Application Of The General Anti-Abuse Rule Of The Parent-Subsidiary Directive' (Lexology, 2020)
4 Atul Gupta and StefNicovich, 'Vodafone India: The Indian Wireless Industry' (2019) 9 Emerald Emerging Markets Case Studies. https://doi.org/10.1108/EEMCS-06-2018-0134
5 Annette Alstadsæter, NielsJohannesen and Gabriel Zucman, 'Tax Evasion And Inequality' (2019) 109 American Economic Review. DOI: 10.1257/aer.20172043
6 ParthasarathiShome, 'Specific Anti-Avoidance Rules (SAAR)'  Taxation History, Theory, Law and Administration. DOI: 10.1007/978-3-030-68214-9_28
7 Auburn Bing Liang, 'Comparative Analysis Of The United Kingdom Judicial Anti- Avoidance Rule And GAAR Of Canada - Lesson For The UK From Canada | LundsUniversitet' (Lu.se, 2013)
8 YigeZu and Richard Krever (Core. ac. the UK, 2017)
9 Judith Freedman, 'Tackling Fiscal "Abuse Of Law" In The UK: Different Routes To A Single Destination' (Ora.ox.ac. the UK, 2019)