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General Anti Avoidance Rule (GAAR)

May 17th, 2012 2 comments

The issue of the General Anti Avoidance Rule (GAAR) has dominated the news recently and there are fears that GAAR will discourage foreign investment in India.  However, tax avoidance can hinder public finance objectives and it is in this context GAAR was introduced in this year’s Budget.  Last week, the Finance Minister pushed back the implementation of GAAR by a year.

What is GAAR?

GAAR was first introduced in the Direct Taxes Code Bill 2010.  The original proposal gave the Commissioner of Income Tax the authority to declare any arrangement or transaction by a taxpayer as ‘impermissible’ if he believed the main purpose of the arrangement was to obtain a tax benefit.  The 2012-13 Finance Bill (Bill), that was passed by Parliament yesterday, defines ‘impermissible avoidance arrangements’ as an arrangement that satisfies one of four tests.  Under these tests, an agreement would be an ‘impermissible avoidance arrangement’ if it  (i) creates rights and obligations not normally created between parties dealing at arm’s length, (ii) results in misuse or abuse of provisions of tax laws, (iii) is carried out in a way not normally employed for bona fide purpose or (iv) lacks commercial substance. Read more…