December 2012

The GAAR report was submitted to the finance minister of India by the Shome Committee constituted by the Central Board of Direct Taxes, after the approval of Prime Minister of India. The committee in its report has tried to create a balance in between the investors being invited to the country and protection of the tax base from tax avoidance and evasion, using aggressive tax planning.

The major findings of the GAAR’s committee to create a balance in between the investors and chances of tax avoidance and evasion includes:

1. Tax Evasion, Tax Mitigation and Tax Avoidance

2. Overcharging Principle Applicability of GAAR

3. Monetary Threshold

4. Arm’s Length Test

5. Test to Misuse or Abuse the Provisions of Act

6. Factors for determination of Commercial Substance

7. Grandfathering of existing Investments

8. GAAR will not override the CBDT circular 789 of 2000 with respect to the tax-treaty in between India and Mauritius

9. GAAR will not be applicable at places where so ever anti-avoidance provisions are in existence in the treaty of tax and any type of anti-avoidance rule exists in the Act

10. Impermissible Avoidance arrangements

11. Tax abolition in cases of gains that rises out by the transfer of listed securities

12. Foreign Institutional Investors

13. Corresponding adjustments

14. Implementation of the Onus on the revenue authority

15. Tax Withholding

16. Definition of the term Connected Person

17. Constitution of approval panel

18. Time limit for GAAR provisions

19. AAR to pass ruling within 6 months

20. Prescription of Statutory forms

21. Implementation issue

22. Reporting requirements

The committee in its findings has stated that the GAAR guidelines should be introduced in the country at the time of economic stability. Hence, it has recommended the postponement of its implementation by 3 years. Committee’s recommen-dation also states about the implementation of the findings with complete spirit and has laid emphasis on transition period of the taxpayers and preparedness of the administrators. To provide clarity on GAAR’s applicability provisions in different situations 27 illustrations were made and are mentioned under different conditions like:

1. Tax Mitigation- GAAR can’t be invoked

2. Tax Avoidance- SAAR is applicable hence GAAR is not invoked

3. Court Approved Amalgamations or demergers

4. Tax Avoidance- GAAR invoked

5. Tax Evasion can directly be dealt of law without invoking the GAAR

Following the Finance Act 2012, the introduction of the General Anti-Avoidance Rules (GAAR) was done into the Income Tax Act, 1961. The committee briefly analysed the provisions of GAAR as per the inputs available from stakeholders and following the recommendations made the amendments in the Act were made for finalization of the guidelines for the Income Tax Rules, 1962.

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