General Anti-Avoidance Rules A general anti avoidance rule (GAAR) is a set of broad and general principles-ba sed rules

enacted in the tax code aimed at counteracting avoidance of tax. The U K does not currently have a GAAR, but instead a series of targeted anti avoidanc e rules (TAARs) which aim to prevent tax avoidance in specific areas of the legi slation Rules of GAAR Under these rules, I can take action against those people involved in tax avoida nce. I, the Income Tax Commissioner, will have full power to decide whether a busines s deal is genuine or some sham to avoid tax payment. It doesnt matter whether the business deal was done in India or outside India or It doesnt matter whether the deal is between any Indian citizens / NRIs / Foreign ers. It doesnt matter whether the deal is protected by some bi-lateral tax treaty betw een India and the given country. GAAR provisions shall override the terms of any Double Taxation Avoidance Agreem ent (Tax Treaty) that India may have entered into. I can send notice to the concerned parties and demand explanation. After hearing their side, if Im not satisfied, I shall order my Assessing offer ( AO) within 12 months, to take necessary action against them and recover the taxe s. If the party is unhappy with my order, it can appeal in Dispute resolution Panel (DRP), which will consist of three IT Commissioners like me. DRP will have to give the verdict in nine months. If the party is still unhappy with DRP verdict, it can file appear before the In come Tax Appellate Tribunal (ITAT) If party is unhappy even after ITAT verdict, it can approach High court and Supr eme Court. Summary Tax avoidance like tax evasion, seriously undermines the achievements of the publ ic finance objective of collecting revenues in an efficient, equitable and effec tive manner. And so in 1988 Canada became the first country to introduce GAAR. It was prospec tive including a grandfathering clause and aimed at preventing artificial tax av oidance agreements. Canada s GAAR applies to transactions alone or part of a ser ies, that result in a tax benefit, that cannot reasonably have been undertaken f or bona fide purposes other than that tax benefit and that can reasonably be con sidered to result in a misuse or abuse of other tax provisions Many believe GAAR (General Anti Avoidance Rules) is a necessity in this day and age of multi jurisdiction business operations, financial complexity and aggressi ve planning. But no business in this country wants an anti avoidance law and def initely not the kind of GAAR that s currently taking shape in India. So, to your committee falls the task of implementing a more humane GAAR. A fair, less ambig uous GAAR and a GAAR that doesn t scare away legitimate investment. Now you said you will be studying what other countries have done and so we thought we would bring you on this special addition of The Firm, experiences of the oldest and on e of the youngest anti avoidance regimes in the world. GAAR concept A broad spectrum GAAR carries a real risk of undermining the ability of business and individuals to carry out sensible and responsible tax planning and that on t he other hand introducing a moderate rule which does not apply to responsible ta x planning, and is targeted at abusive arrangements would be beneficial. First condition for the application of GAAR is that the main purposeor one of th

e main purposes of the arrangement is to obtain a

1 Background In several subsequent tax cases including Ramsay v.IRC and others,English Courts have consistently affirmed the cardinal principle that if adocument or a transa ction is genuine,Courts cannot go behind it to somesupposed underlying substance . This principle has been applied in India tooin several cases, the more recent among them being the Azadi BachaoAndolan case and the Vodafone case. However, this long standing principle is set to face legislative reversal withth e introduction of GAAR in the Finance Bill. Broadlyspeaking, GAAR will be applicable to arrangements/transactions which are regarded as impermissible avoidance arrangements and will enable tax authorities, among otherthings, to re-characterise sucharrangements/transactions so as to den y tax benefits Main purpose or one of the main purposes of an arrangement is to obtain tax bene fitNot at armslength Impermissible Avoidance Arrangement (IAA)Consequences Disre gard part of arrangementMisuse/abuseTax provisionsLacks commercialsubstanceNot f or bonafidepurposesDisregardCorporate structureDeny treatybenefitReassign placeR eassign incomeRecharacterise equity / debt Main purpose or one of the main purposes of an arrangementis to obtain tax benef it First condition for the application of GAAR is that the main purposeor one of th e main purposes of the arrangement is to obtain a tax benefit The term tax beneft is defined in s. 102 (11) as a reduction or avoidance or deferral tax or other amount payable under this Act; anincrease in a refund of tax or other amount under thisAct; orc. areduction or avoidance or d eferral of tax or other amountthat wouldbe payable under this Act, as a result o f a tax treaty; ord. anincrease in a refund of tax or other amount under this Ac tas a resultof a tax treaty; ore. a reduction in total income including increase inloss,in the relevant previous year or any other previous year.

2 India has deferred by a year the rollout of measures to crack down on tax evasio n, which had sparked an outcry among foreign investors, but has yet to provide c lear guidelines on the proposals. Here are some quick facts that pertain to markets about the proposed changes and clarifications on GAAR announced by Finance Minister Pranab Mukherjee. Prime Mi nister Manmohan Singh has now taken additional charge of the ministry after Pran ab Mukherjee resigned to take part in the Presidential elections. * The General Anti Avoidance Rule, or GAAR, was proposed in mid-March as part of the budget for fiscal 2013. * GAAR aims to target tax evaders, partly by stopping Indian companies and inves tors from routing investments through Mauritius or other tax havens for the sole purpose of avoiding taxes. * 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. * Finance Minister Pranab Mukherjee on Monday proposed to defer the rollout of G AAR by a year to the financial year that begins in April 2013 to "provide more t ime" to both taxpayers and the tax office "to address all related issues". * The finance minister proposed to remove the onus of proof entirely from the ta xpayer and shift it to the revenue departments. * A local or foreign taxpayer will also be able to approach authorities in advan ce for a ruling on their potential tax liabilities, Mukherjee proposed. * An independent member would be in the GAAR approving panel, while one member w ould 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 Genera l of Income Tax, with the task of providing recommendations by May 31 for formul ating the rules and guidelines to implement GAAR provisions. * On the proposed retrospective amendment in tax rules, Mukherjee said the chang es will not override the provisions of double-tax avoidance treaties India has w ith 82 countries. * The retroactive changes will only impact those cases where a deal has been rou ted through low-tax and no-tax countries with whom India does not have tax treat ies. * The proposed retrospective changes in tax rules will not be used to reopen cas es where assessment orders have already been finalised, Mukherjee said. * Mukherjee proposed to reduce long-term capital gains tax on private equity fir ms 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 inve

stors. * The finance minister also proposed to cut the withholding tax to 5 per cent fr om 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. * Mukherjee proposed to extend the tax exemption on long-term capital gains rela ted to the sale of unlisted securities in an initial public offering. The levy o f 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 GAAR being dropped, as it will mean changes in the Finance Act. * The ministry put out a comprehensive draft of new guidelines for General AntiAvoidance Rules on Thursday. Releasing the draft guidelines, the finance ministr y committee stated that non-resident investors of FIIs will be exempt from the r ules, and also called for a monetary threshold from which GAAR will be implement ed. * According to the draft, GAAR will come into effect from April 1 2013. Accordin g to the guidelines, FII not opting for treaty benefits and ready to pay taxes w ill not come under GAAR, but those who do opt for dual taxation avoidance agreem ents will come under its purview

3 general anti-avoidance rule GAAR A general anti avoidance rule (GAAR) is a set of broad and general principles-ba sed rules enacted in the tax code aimed at counteracting avoidance of tax. The U K does not currently have a GAAR, but instead a series of targeted anti avoidanc e rules (TAARs) which aim to prevent tax avoidance in specific areas of the legi slation. The government has stated that it will explore whether there is a case for the i ntroduction of a GAAR. Towards this end, a study group headed by Graham Aaronson QC was set up in December 2010 and its report recommending the introduction of a GAAR in the UK that is targeted on flagrant, abusive and artificial schemes wa s published in November 2011. The Government confirmed at the 2011 Autumn Statem ent that it will be announcing its formal response to the report at the time of the 2012 Budget