General anti-avoidance rule (GAAR) is an anti-tax avoidance Rule of India. It is framed by the Department of Revenue under the Ministry of Finance. Originally proposed in the Direct taxes code 2009,are targeted at arrangement or transactions made specifically to avoid taxes.It was introduced by then Finance Minister, Pranab Mukherjee, on 16 March 2012 during the Budget session. It was considered controversial because it had provisions to seek taxes from past overseas deals involving local assets retrospectively .
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During the 2015 Budget presentation, Finance Minister Arun Jaitley announced that its implementation will be delayed by 2 years.
Background
In 2007, Vodafone entered the Indian market by buying Hutchison Essar. The deal took place in Cayman Islands. The Indian government claimed over US$2 billion were lost in taxes. In September 2007, a notice was sent to Vodafone. Vodafone claimed that the transaction was not taxable as it was between two foreign firms. The government claimed that the deal was taxable as the underlying assets involved were located in India. In India, the real discussions on GAAR came to light with the release of draft Direct Taxes Code Bill (popularly known as DTC 2009) on 12 August 2009. It contained the provisions for GAAR. Later on the revised Discussion Paper was released in June 2010, followed by tabling in the Parliament on 30 August 2010, a formal Bill to enact the law known as the DirectTaxes Code 2010. The same was to be made applicable wef 1 April 2012. However, owing to negative publicity and pressures from various groups, GAAR was postponed to at least 2013, and was likely to be introduced along with the Direct Tax Code (DTC) from 1 April 2013. Moreover, an Expert Committee has been set by Prime Minister (Manmohan Singh) in July 2012 to vet and rework the GAAR guidelines issued in June 2012. The latest reports (September 2012) indicates, it may not be implemented even for 3 years i.e. this will be postponed for 3 years (2016–17).
Some of recent developments about GAAR are:
Thus now
On 20 January 2012, the Supreme Court of India gave the verdict in favour of Vodafone, saying that Vodafone did not owe any capital gain taxes. On 16 March, GAAR was presented to the Parliament by Pranab Mukherjee, who stated that its objective was to counter aggressive tax avoidance schemes.
Summary
The regulation allows tax officials to deny tax benefits, if a deal is found without any commercial purpose other than tax avoidance. It allows tax officials to target participatory notes. Under GAAR, the investor has to prove that the participatory note was not set to avoid taxes. It also allows officials to deny double taxation avoidance benefits, if deals made in tax havens like Mauritius were found to be avoiding taxes.
Responses
Adrian Mowat of JP Morgan in May 2012 said that there were ambiguities in the law and that it may discourage foreign investors. In May 2012, CLSA stopped issuing Indian participatory notes.