[Economy] General Anti-Avodiance Rules (GAAR): Meaning, Pros, Cons, Implications, Explained

[Economy] General Anti-Avodiance Rules (GAAR): Meaning, Pros, Cons, Implications, Explained

  1. Drafting of the DTC Bill
  2. Rules of GAAR
  3. Burden of Proof
  4. Parliament of India (August 2009)
  5. Review by Standing Committee
  6. Pro and Anti GAAR viewpoints
  7. Summery
  8. Epilogue

Location: Ministry of Finance, Delhi (2008)

Why government wants to extract maximum revenue?

Pranab Ok, This year we need to collect 8 lakh crores to finance our bogus schemes and other “Royal” Expenditures such as luxury foreign vacation trips of Pratibha + business-class Air-tickets for Sharad et al.. I’ve told the custom and excise Department to collect 3 lakh crores in indirect taxes, and you get me the remaining 5 lakh crores from direct taxes. Else I won’t promote you. Understood?
IT Commissioner But sir your target is implausible just like reading entire Mishra-Puri and Dutt Sundaram for economy!
Pranab Well, the Diamond traders in Surat and Builders in Mumbai got plenty of black money. You raid their offices every month, starting from tonight.
IT Commissioner We are already doing that. Yes, we recovered truckload of cash but still your target is just way too high.
Pranab Then catch those big fishes that use Cayman island and other tax havens for making business deals!
IT Commissioner Matter is outside my jurisdiction. And even if I try to do something about it, they’ll go to court and win the case. So, First, you’ve to update the Income tax act of 1961.
Pranab Betaa “I” don’t have to update the IT Act. It’s your job to write the bill, give paper to me; I present it in parliament, and if parliament approves and President signs, the bill becomes the Act and I take all the credit.

IT Commissioner calls up other senior and experienced officers from his department and starts updating the Income Tax Act.

Drafting of the DTC Bill

IT Commissioner Alright. I’m done writing the major provision about Income Tax in Direct Tax Code. Only one part remains: Our Department must have the power to take action against these folks who use tax-havens for making business deals.
Retired IT officer Yes, We should make the necessary rules and call it GAAR: General Anti-Avoidance Rules.
IT Commissioner Wow that name GAAR sounds really unique and awesome, as if the *Singham* (lion) is roaring grrrr…I wish I could get selected in IPS ?
Retired IT officer Betaa there is nothing really unique or awesome in GAAR.Australia has GAAR since 1981.Then Canada, New Zealand, Germany, France and South Africa also adopted GAAR. Hell even China got GAAR in 2008!I’m surprised to see Indian authorities were sleeping all these years and suddenly realized in 2009 that we too need a GAAR!
IT Commissioner Well, Better late than never!

Both gentlemen watch Tarak Mehta kaa Ooltaa Chashma on SAB-TV and write the GAAR rules for India in between the advertisement breaks.

IT Commissioner (To Pranab):Sir, I’ve finished drafting the DTC and included GAAR In it. Let me tell you the specific rules under this GAAR, which are as following

Rules of GAAR

  • Under these rules, I can take action against those people involved in tax avoidance.
  • I, the Income Tax Commissioner, will have full power to decide whether a business deal is genuine or some sham to avoid tax payment. It doesn’t matter whether the business deal was done in India or outside India or
  • It doesn’t matter whether the deal is between any Indian citizens / NRIs / Foreigners.
  • It doesn’t matter whether the deal is protected by some bi-lateral tax treaty between India and the given country.
  • GAAR provisions shall override the terms of any Double Taxation Avoidance Agreement (Tax Treaty) that India may have entered into.
  • No ifs and not buts; I’ll have full jurisdiction to question any business deal.
  • I can send notice to the concerned parties and demand explanation.
  • After hearing their side, if I’m not satisfied, I shall order my Assessing offer (AO) within 12 months, to take necessary action against them and recover the taxes.
  • 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 Income Tax Appellate Tribunal (ITAT)
  • If party is unhappy even after ITAT verdict, it can approach High court and Supreme Court.

Burden of Proof

  • In the regular criminal cases, suspect is presumed innocent until proven guilty. The burden of proof rested on the prosecution, i.e. Sarkaari Vakil (and Police) has to convenience the court that Raja is guilty.
  • However, in case of GAAR, the burden of proof rests with the party, Raja has to prove that he is innocent.
  • This is similar to TADA and POTA: Burden of Proof rested on the suspect. The Suspect was presumed guilty, and he had to prove that he had no criminal intent.

Pranab: Very good. Just the way I wanted it. Now I’ll table this bill in parliament.

Parliament of India (August 2009)

Pranab tables the Direct Tax Code-2010 bill in parliament. As usual Opposition MPs start shouting slogans against him.

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