Executive summary Pre GAAR concept Pre GAAR concept – India experience GAAR concept International experience India Regime Way forward
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General Anti-Avoidance Rules India and International perspective
“Tax avoidance like tax evasion, seriously undermines the achievements of the public finance objective of collecting revenues in an efficient, equitable and effective manner1.” Internationally, tax avoidance has been recognized as an area of concern and several countries have expressed concern over tax evasion and avoidance. This is also evident from the fact that either nations are legislating the doctrine of General Anti-Avoidance Regulations in their tax code or strengthening their existing code. In India, the proposed Direct Tax Code 2010 (DTC 2010 or Code) seeks to address the issues relating to tax avoidance and evasion by bringing in General Anti-Avoidance Rules (GAAR) in addition to various transaction-specific Special Anti-Avoidance provisions. The Discussion paper issued along with the proposed new tax code states that tax avoidance arrangements adopted by taxpayers span across several tax jurisdictions, and it is desirable to introduce GAAR that would serve as a deterrent to the use of increasingly sophisticated forms of tax avoidance by taxpayers. The paper also states that the appellate authorities and Courts have cast a heavy onus on the revenue authorities for dealing with matters of tax avoidance, especially when the relevant facts are in the exclusive knowledge of the taxpayer who chooses not to reveal them. The introduction of GAAR regulation recognizes that it may not always be feasible for the judiciary to address the unforeseen implications of transactions carried out for tax purposes and also the need to provide some semblance on the matter of tax avoidance. However, where tax benefit is to be considered as the sole criterion (as is currently recognized under the proposed new Code) for determining tax avoidance, such a provision may undermine the common denominator in determination of a tax avoidance scheme, i.e., the principle that though the taxpayer is free to choose the most tax efficient method, the commercial justification for the choice taken and tax consideration (benefit) is not the only reason. Considering the goals of tax avoidance legislation, namely, deferral, re-characterization, elimination and shifting, India would need to address the issue in the proper perspective so that the provisions and their implementation do not become a law onto themselves. In the circumstances, one should be aware of some issues relating to the promulgation of a General AntiAvoidance Rule, in terms of it being receptive to: • Providingarobustframeworkbasedonsoundlegal jurisprudence and principles to address the issue of abusive transactions, which tend to ride on the shortcomings of the tax system. As indicated by many international tax theorists and practitioners, the design of GAAR should be by reference to ‘business-purpose test’ with emphasis on the different concepts of the economic substance associated with the categories of tax avoidance behavior, such as tax evasion, acceptable tax avoidance and abusive tax avoidance rather than narrow the scope to the aspect of a tax benefit test. • Incorporateasubstanceoverformrulewherea transaction or a series of transactions are entered into to judge the authenticity and purpose of the transaction rather than teleologically apply the tax benefit provision, surpassing all other aspects of the transaction.
Discussion paper on Direct Taxes Code 2009
• Theissueofbilateraltaxtreatyoverridebywayof bringing the same under the relevant treaties in terms of limitation of benefits clause. In the absence of the same, it may result in violation of international principles of...