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GAAR stands forGeneral-Anti-Avoidance Rules and it has been introduced in India

due to VODAFONE case ruling in favor of this company by the Supreme Court.

Indian Government is trying to give powers to income tax authorities as implementation

of GAAR provides tremendous powers to deny tax benefit to an entity if a transaction

has been carried with the sole intention of tax avoidance. Due to powers in the hand oftaxmen, now innocents may be harassed by them.

However, the ambiguous language, the lack of details, and the sudden onset of the

provisions have been among the factors that have upset foreign investors.

To make it easier to understand GAAR; we can say that suppose a person or a

company is setting up business in Gulf Country and its clear intention is to claim

exemption from capital gains tax, in such a scenario Indian govt has the right to deny

the legitimate claim for exemption provided under DTAA as it falls under tax avoidance

and Indian govt is trying to plug the loopholes.

Here are few salient facts about General Anti Avoidance Rules (GAAR)

A local or foreign taxpayer will also be able to approach authorities in advance for a

ruling on their potential tax liabilities, Mukherjee proposed.

An independent member would be in the GAAR approving panel, while one member

would be an officer of the level of Joint Secretary, or above, from the Ministry of Law.

A committee would be constituted under the Chairmanship of the Director General of

Income Tax, with the task of providing recommendations by May 31 for formulating the

rules and guidelines to implement GAAR provisions.

On the proposed retrospective amendment in tax rules, Mukherjee said the changes will

not override the provisions of double-tax avoidance treaties India has with 82 countries.

The retroactive changes will only impact those cases where a deal has been routed

through low-tax and no-tax countries with which India does not have tax treaties.

The proposed retrospective changes in tax rules will not be used to reopen cases where

assessment orders have already been finalized, Mukherjee said.

Mukherjee proposed to reduce long-term capital gains tax on private equity firms on the

sale of unlisted securities to 10 percent, from 20 per cent currently, and bring the tax

rate in line with what is charged from foreign portfolio investors.

The finance minister also proposed to cut the withholding tax to 5 per cent from 20 per

cent currently on funding through foreign loans for all businesses. The budget in mid-

March had proposed a lower withholding tax for some sectors.

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Mukherjee proposed to extend the tax exemption on long-term capital gains related to

the sale of unlisted securities in an initial public offering. The levy of the Securities

Transaction Tax would be levied at the rate of 0.2 per cent on the sales of unlisted

securities.

Finance Ministry sources told NDTV on Thursday that there is no indication of GAARbeing dropped, as it will mean changes in the Finance Act.

The ministry put out a comprehensive draft of new guidelines for General Anti-

Avoidance Rules on Thursday. Releasing the draft guidelines, the finance ministry

committee stated that non-resident investors of FIIs will be exempt from the rules, and

also called for a monetary threshold from which GAAR will be implemented.

According to the draft, GAAR will come into effect from April 1 2013. According to the

guidelines, FII not opting for treaty benefits and ready to pay taxes will not come under

GAAR, but those who do opt for dual taxation avoidance agreements will come under itspurview.

The key issues under the proposed GAAR are:

Tax avoidance has been widely defined with the objective to encompass a number of

circumstances and instances of tax avoidance, leading to uncertainty and extensive

litigation.

GAAR can be invoked where obtaining a tax benefit is the main purpose, and it is not

clear as to what is meant by main purpose; the courts would be left to decide whether

in the given facts the main purpose of the transaction/arrangement was to obtain taxbenefit.

Where an adjustment is made (invoking GAAR), it is not clear whether the full effect of

the same would be given to ensure that there is no double taxation.

The onus of proving that an arrangement has not been carried out for the main purpose

of obtaining a tax benefit is with the taxpayer, while the tax authorities may not have any

evidence of tax avoidance.

There is no cut-off date for applicability of GAAR provisions to any arrangement and,

therefore, where the impact of past arrangements continues in Direct Tax Code regime;the same may still be covered by GAAR irrespective of the fact that the arrangement

has been approved by the tax officer or subjected to judicial review.