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Why This GAAR?

Shubhangi Gupta & Arnab Naskar

Why This GAAR?

Arnab Naskar & Shubhangi Gupta
GAAR is destined to be a way of life for taxpayers in India. But is it a boon or a curse? How does it compare with the provisions in other Countries? Does it have loopholes? Can it be circumvented? Will it be used as a tool to harass the taxpayer? These are the crucial existential questions that the young authors have dared to ask and, after commendable research, answered them with remarkable clarity

1.      Introduction

A country levies taxes, both direct and indirect for promoting its own economic development. For economic development not only domestic capital is necessary but also the contribution of foreign capital in the domestic market is required. Prior to 1970, world trade grew at a greater pace than that of the FDI, but in the following decades since then the flow of FDI has grown at twice the pace of the growth of worldwide exports.1 Hence the sovereign authorities felt the need to relax the taxation statutes in order to seek contribution from foreign capitalists, with an ultimate motive of economic development.

Despite the codiaied relaxation available under taxation statutes, assesses always had an intention to bypass tax authorities, both, legally and illegally. Tax avoidance measures have their beginning in the fraus legis2 principle, from Roman law. This principle, transposed from private law, has been successfully applied in developing measures to prevent tax avoidance, both in the form of a codified anti-avoidance legislation and as evolving judicial intervention. With the increasing globalisation of economies and growth in cross border transactions, many countries3 have introduced anti-avoidance legislation(s) which has empowered the Revenue Authorities to question transaction(s) and arrangement(s) disregarding their tax benefit unless in absence of any commercial legitimacy of that transaction(s)/arrangement(s)4. In India, there are ‘Specific Anti-Avoidance Rules’ (SAAR) in the domestic tax laws as well as ‘Limitation of Benefits’ (LOB) clauses in some tax treaties5.

In the background mentioned above, General Anti-Avoidance Rule (GAAR) was introduced in Finance Act, 2012, with a view to make it effective from Financial Year 2013-14. It empowered the tax authorities of India to deny the tax benefits of transaction(s) or arrangement(s) which do not have any commercial substance or consideration, other than achieving tax benefit.

In India, the proposed Direct Tax Code, 2010 (DTC, 2010) seeks to address miscellaneous issues, concerned tax evasion and tax avoidance; by bringing in General Anti-Avoidance Rules (GAAR), in addition to various transaction-specific Special Anti-Avoidance provisions.6

This research paper seeks to understand and analyze the law relating to piercing the GAAR and international perspective. In this paper we have first discussed about how the anti-avoidance rules are implemented with special reference to Indian context. Thereafter the paper seeks to analyze the specific reasons introducing GAAR in India. Following this, the paper investigates into GAAR provisions in various jurisdictions. Further, the paper critically analyses the provisions of GAAR in the Finance Act, 2012 and draft rules. Finally this paper suggests reforms to the law and concludes.

2.      Anti-Avoidance Rule

The concept of GAAR is not new to India since India already has a Judicial Anti-Avoidance Rule, similar to some other jurisdictions.7 The concept of Anti-avoidance rule can better be understood by classifying the method(s) of its implementation into three categories namely: (i) measured based upon principles of law interpreted by the judiciary; (ii) General Anti-Avoidance Rule and lastly (iii) Specific Anti-Avoidance Rule. Discussing each classification herein under:

2.1    Measure based upon principles of law interpreted by the Judiciary

Over the years the Hon’ble Supreme Court has tried to save the interests of Tax Authorities and the Assesses by interpreting the law according to the principles laid down by various National as well as Foreign judgments. This includes range of philosophies and debates regarding ‘substance’ over ‘form’8 and ‘abuse of law’9.

2.2    General Anti-Avoidance Rule

GAAR, as its name suggests, is a set of general anti-avoidance rules which usually take the form of a legislative instrument; better to consider it as a ‘catch-all’ for tax avoidance.10 The main triggering incident of attracting GAAR lies in the fact that the tax avoidance schemes are becoming increasingly complex, therefore, it is getting tougher for the Tax authorities to determine the path for tax avoidance. To put in simple words GAAR is basically an attempt to strike down avoidance of taxes that was not understood a probable method of tax evasion at the time of drafting any taxation statute. The difficulty with having such a broad scheme has been heavily debated in various countries as and when they grappled with the thought of introducing GAAR.

2.3.   Specific Anti-Avoidance Rule

The Specific Anti-Avoidance Rule targets reducing specific avoidance practice or technique.11 SAAR is comparatively more specific and helpful in reducing time and costs involved in litigations compared to JAAR. Unlike GAAR, SAAR does not grant unfettered discretion upon tax authorities. While SAAR is promulgated to counter a specific abusive behaviour, GAAR is devised to supplement SAAR and to cover transactions that are not covered by SAAR. There are certain instances, where the Indian judiciary has effectively applied the existing SAAR provisions to counter tax avoidance in absence of GAAR.12

3.      Background of Introducing GAAR in India

It is human nature to avoid paying taxes. Avoidance may be in illegal manner as well as legal. To distinguish between this legality and illegality of tax avoidance, judiciary has interfered in the matter time and again, in both national and international forum. Need of GAAR did arise all of a sudden. Various reasons triggered the intention of introducing GAAR in India. Firstly, different ways to reducing tax burden; secondly, age old debate of ‘form’ versus ‘substance’ and finally, the hot debated Vodafone judgment in light of mode(s) of interpreting the taxing statutes.

3.1    Various Ways To Reduce Tax Liability

Burden of taxes can be reduced by various ways. Below mentioned are the most common ways of reducing tax burdens. Some of them are illegal while some are considered to be legal.

3.1.1.   ‘Tax Avoidance’ and ‘Tax Evasion’

Tax Avoidance’13 and ‘Tax Evasion’14 are two expressions which derive no concrete definition, neither from the Indian Companies Act, 1956 nor from the Indian Income Tax Act, 1961, but these expressions are being largely used in different contexts by our Honourable courts as well as the courts in England and various other countries, when a subject is sought to be taxed.15 The distinction between the two was first drawn up in the case of IRC v. Fisher’s Executors16, an English decision, that the subject is entitled so to arrange his affairs as not to attract taxes imposed by the Crown, so far as he can do so within law and that he may legitimately claim the advantage of expressed terms or any omissions that he can find in his favour in Taxing Acts. In doing so he neither comes under any liability nor incurs blame. This means that under tax evasion, tax payers resort to unfair and fraudulent means to avoid tax; all the details kept camouflaged and masked by the taxpayers, whereas, in case of tax avoidance the key facets are not kept latent by the tax payers but are disclosed to the tax authorities. Therefore, in order to do away with tax avoidance many countries decided to resort to GAAR. GAAR is not an antidote for ‘Tax Evasion’, but for ‘Tax Avoidance’.

3.1.2.   Concept of Tax Planning

Tax planning is process by which individuals, businesses, and organizations evaluate their financial profile, with the aim of minimizing the amount of taxes to be paid on personal income or business profit.17 In the words of Justice Rangnath Misra of Supreme Court in the case of McDowell & Co Limited v. CTO18, “tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid payment of tax by resorting to dubious methods.”

3.1.3.   Meaning of Tax Mitigation

In furtherance of the above concepts, Tax mitigation is another possible way to avail taxation benefits by assessees. It is a situation where a taxpayer takes advantage of a fiscal incentive accorded by tax legislation issued by the competent authorities by submitting itself to the conditions and economic consequences of particular tax legislation.19 To illustrate, mitigating tax by setting up a unit in a special economic zone (SEZ) is a case of taking advantage of a fiscal incentive under the tax statute. Tax mitigation shall not be confused with tax avoidance. GAAR provisions do not injure any cases of tax mitigation.

3.2.   Form v. Substance debate

Now coming to the age old debate between whether ‘form’ should prevail over ‘substance’ or vice-versa. In the Vodafone case counsel on behalf of Vodafone continuously argued that the business arrangement did not result in a sham transaction and was perfectly legal in form. Whereas counsel for the Revenue contended that the structure put into place by Vodafone was calculated to avoid tax liability and made for the purpose of tax evasion. Hence this age old debate occupies a significant portion of our analysis for it has far-reaching ramifications on tax planning.

3.2.1.   International perspective

Way back in 1936, the Appellate Court in the case of IRC v. Duke of Westminster20, held that a citizen has the legal right to dispose of his capital and income so as to attract upon himself the least amount of tax. It was made clear that the avoidance of tax is not evasion and carries no ignominy. In the instant case Lord Tomlin through his celebrated words stated that, “Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be.21 Due to heavy misrepresentation of the term “if he can”, the instant case gave an approach that focussed on the legal integrity of individual steps in a transaction, in the belief that legal integrity of the parts meant that tax law had to apply to each step independently, so that the effect of the whole could not be challenged, with the result that ‘form’ prevailed over ‘substance’.22

However post World War period, the House of Lords began to attach a ‘purposive interpretation approach’ and gradually began to emphasise on ‘economic substance doctrine’ as a question of statutory interpretation. In the case of WT Ramsay v. Inland Revenue Commissioners, 23 it was further observed that a subject should be taxed only if there was a clear intendment and the intendment has to be ascertained based upon clear principles and the courts would not approach the issue on a mere literal interpretation24. However the tax planners also misunderstood the Ramsay approach and attempted to limit its application to cases that were similar on their facts in the sense of being self circular and self- cancelling. This error was highlighted in the case of Furniss,25 where the Court denied the tax consequences of a transaction that was linear (rather than circular) in form, further more the Court also stated that even where each step in a transaction was a genuine step producing its intended legal results, the Court was not confined to consider each step in isolation for the purpose of assessing the fiscal results.26 Hence the doctrine of ‘Substance’ over ‘form’ originated.

Fortunately a more sensible approach was re-established by the House of Lords in the case of Craven v. White.27 Whilst acknowledging the correctness of the decisions in Ramsay and Furniss, the Court in the instant case tactically acknowledged that if the tax authorities were to have a power of re-characterization with such a radical and potentially destructive commercial effect, then the bar has to be set at a very high level to permit its use.28

3.2.2.   National Perspective

         The position in India regarding the “substance” over “form” principle has been stepped in controversy relating to the interpretation. However in Vodafone,29 the Apex Court tried to resolve this issue by analysing two conflicting previous decisions of the Supreme Court,30 as to the correct approach to the construction of taxation statutes, when the Court was confronted with a transaction that was designed for the purpose of tax avoidance.

In McDowell,31 specifically with regard to the judgment delivered by the Justice Chinappa Reddy, the Court seemed ready to adopt the Ramsay principle, or ‘the new approach’, as it was then understood, and discarded the requirement based on the Westminster case that tax statutes had to be given ‘literal interpretation’. Whereas in Azadi Bachao Andolan32, the members of the Court appeared to backtrack from that position, commenting that, in their view, the principle of the Westminster case was very much alive and kicking in the country of its birth and affirming the approach of Justice Shah in A Raman & Co.,33 that a taxpayer is entitled to lawfully circumvent but may not violate expect on peril of penalty.

Ultimately the Vodafone judgment concluded by observing that there is no conflict between Mcdowell and Azadi Bachao. The Apex Court relied upon the decision of Constitution Bench of five judges in Mathuram Agarwal v. State of M.P.34 in which Westminster principle was approved.

The Concurring judgment given by Justice K.S. Radhakrishnan, relied upon the case of CIT v. B.M. Kharwar,35 as well as other developments of law36 to come to conclusion that there was no conflict between Westminster and Ramsay principles. Furthermore it also concludes that Mcdowell case is not against genuine arrangement relying upon Mathuram case. It is in light of the same, it was decided that neither Mcdowell case, nor Azadi Bachao case is required to be overruled, since both can be easily reconciled, so as to rule out artificial arrangements.

4.      Concepts of General Anti-Avoidance Rule in Foreign Jurisdictions

Before we part with this discussion, it might be well to consider the position of law in other jurisdictions also. The debate about whether transaction(s) or arrangement(s) should be analyzed for tax purposes on the basis of its legal form or, alternatively, its economic substance has raged across jurisdictions. Below mentioned are the analyses of various jurisdictions:

4.1    GAAR in Australia

GAAR was introduced in Australia in 198137 and finds mention in Part IV-A of the Income Tax Assessment Act, 193638. In order for GAAR to apply, a number of criteria have to be met. Firstly, the arrangement needs to meet the statutory definition of “scheme”, which is so wide that it covers almost every conceivable arrangement, including informal and non-binding agreements39. Secondly, the scheme must produce a ‘tax benefit’. Lastly, and most importantly, the scheme must have been entered into for the sole or dominant purpose of obtaining the tax benefit.

If Part IV-A applies, then the Commissioner of Income Tax has the power to reconstruct the entire transaction to prevent the obtaining of the tax benefit by the taxpayer40. If Part IV-A does not apply then the transaction stands valid under the tax law. The Australian government announced on March 1, 2012 that it would obtain advice from experts about how best to implement Part IVA of the Income Tax Assessment Act, 1936 without unintentionally affecting genuine commercial and business activity41.

As a corollary the Australian government announced on March 1, 201242 that the new concept of ‘tax benefit’ for Australia’s GAAR would be applicable from March 2, 2012. Under the new concept of ‘tax benefit’, it will not be possible for taxpayers to argue that, but for the scheme, they would not have entered into an arrangement that attracted tax by doing nothing, deferring the arrangements indefinitely or undertaking another scheme that also avoided tax43. The proposed amendment would be applicable to schemes entered into after March 1, 2012. However, the proposed changes will not be known until the consultation period going to be held into the Australian Parliament in September to October 2012. The most striking feature of Australian GAAR is onus of proof lies upon the assessees.44

4.2    GAAR in Canada

GAAR was introduced in Canada in 198845 bestowing Canadian Revenue Agency with the unquestionable power of preventing transactions which had the purpose of avoiding tax. For the provisions of GAAR to apply in this country three requirements must be met; firstly, there must be tax benefit accruing from transaction or series of transaction, secondly, the transaction should be an avoidable transaction (as defined in 245(3) of the Income Tax Act), and thirdly, the avoidable transaction should result in direct or indirect abuse provisions of Canadian Income Tax Act and the respective Treaties46.

On December 16, 2011 the Supreme Court of Canada gave its decision in Copthorne Holdings Ltd. v. Canada47. In the instant case the court affirmed that the tax department has the statutory power to deny a taxpayer any benefits that accrue from transactions that are conducted primarily for purposes of exploiting loopholes in the law48. The onus of negating the fact that there is no tax benefit and the transaction entered is not an avoidable transaction lies upon the taxpayer; whereas, the onus of proving the avoidable transaction has directly or indirectly led to misuse or abuse the provisions of Income Tax Act lies on the Canadian Revenue Authority.

4.3    GAAR in United States

Prior to the introduction of a GAAR, the United States had several judicial anti-avoidance doctrines49. In US, before 2010, GAAR was mainly a judicial doctrine that the courts applied under the name of ‘Economic Substance Doctrine’50. The United States has not enacted any GAAR, although the Internal Revenue Code has many specific anti-avoidance rules that are expressed to apply where the purpose of a particular transaction is avoidance of federal income tax laws51.

4.4    GAAR in United Kingdom

The UK legislation contains SAAR, but does not have a statutory GAAR. Hence, judges apply the principles of statutory interpretation to interpret the domestic law in a way consistent with parliamentary purpose and commercial realism. The UK government constituted a Study Group under Mr. Graham Aaronson (Queen’s Council) in December 2010, to consider whether the introduction of the GAAR would be beneficial for UK tax regime52. Several factors were taken into consideration by the Study Group including whether the introduction of GAAR might make UK’s tax system less vulnerable to business. In its report published in November 2011, the Study Group concluded that introducing a broad-spectrum GAAR would not be beneficial to the UK tax system and would carry the real risk of undermining the ability of businesses and individuals to carry out sensible and responsible tax planning53. However, the report clearly acknowledged the need of introducing a narrowly focused GAAR, which does not hinder responsible tax planning but targets artificial and abusive arrangements54.

After considering the report of the Study Group in detail, government conceded to the recommendation that narrow anti-avoidance rule, targeted at artificial and abusive tax avoidance scheme, would ameliorate UK’s ability to tackle tax avoidance while maintaining the attractiveness of UK as a location for genuine business investment. In its Finance budget 2012, the UK government announced that it will hold further consultations with large businesses houses and their advisers to discuss a possible introduction of GAAR legislation in the Finance Bill, 201355. Accordingly a consultation paper was released on 12th June, 2012, which laid down the proposals for consultation with the businesses, individuals, representative bodies and other interested parties.

5.      GAAR under Finance Act, 2012

         The provision of GAAR is not to discourage tax planning but it is to set a level of tax planning so that fair share should be paid by tax payer to the sovereign nation. GAAR not only helps in setting a fair share but also serves an important role in context of the applicability of the canon of taxation i.e. equity. The Indian Government released the draft of Direct Taxes Code Bill (DTC) in August 2009. This was subsequently followed by releasing of the Revised Discussion Paper in June 2010. DTC, 2009 marked the introduction of GAAR into the Income Tax law in India56. The Finance Act, 2012, which was passed after the landmark Supreme Court judgment of Vodafone,57 inserted new Chapter X-A consisting of new Sections 95, 96, 97, 98, 99, 100, 101 and 102 relating to GAAR.

GAAR proposed by the then Union Finance Minister Pranab Mukherjee, during the annual budget 2012-13, prevents tax evaders, from routing investments through tax havens like Mauritius, Luxemburg, Switzerland.58 Broadly speaking, GAAR will be applicable to those arrangement(s)/transaction(s) which are regarded as ‘impermissible avoidance arrangements’ and will enable tax authorities, among other things, to re-characterise such arrangement(s)/transaction(s) so as to deny tax benefits.59 Once arrangement(s)/transaction(s) have been declared as an ‘impermissible avoidance arrangement’60, the consequence as regard the tax liability would also be determined.

5.1    Scope And Applicability

The scope of GAAR is quite extensive. It includes all the arrangement(s)/transaction(s) which include an element of tax benefit incurred by the tax payer. All the business ventures entered for accruing tax benefit are the major target under GAAR provisions. The provisions of GAAR would be applicable to all taxpayers irrespective of their status (corporate entity, non-corporate entity, resident or non-resident).

5.2    GAAR Provisions under Indian Law: An Analysis

The Indian GAAR provisions aim at codifying of ‘substance’ over ‘form’ approach.61 These provisions empower the revenue authorities, as per the provisions enumerated under the Act, to declare any arrangement or transaction as ‘impermissible avoidance agreement’62. In this sub-part, we have tried to touch every important aspect of Chapter X-A of the Finance Act, 2012 read with the draft rules issued by the Shome Committee. In order to bring more clarity in this discussion we have recommended few changes in this part itself which we felt necessary to be discussed in this part alone so as to stress upon the real necessity. The rest of the recommendations have been given in the Part- VII of this paper.

5.2.1.   Impermissible Avoidance Arrangement

Section 95 of the Finance Act, 2012 provide that an ‘arrangement’63 entered into by an assessee may be declared to be an ‘impermissible avoidance arrangement’ by the tax authority and consequences in relation to tax of such a declaration can be determined. Bare perusal of this section makes its evident that this section starts with a non-obstante clause, i.e. if there is a conflict with provisions, in other section(s), then those of this section shall prevail over other conflicting provision(s).

The term ‘impermissible avoidance arrangements’64 mentioned under section comprises two tests: the first one is the main purpose test and the second is the specified condition test. The main purpose test is to obtain ‘tax benefit’65; the term whose meaning connoted large significance in the Finance Act, 2012 compared to the DTC Bill, 2010.66 Both the term ‘Tax Benefit’ and ‘Benefit’ are defined under Section 102(11) and Section 102(4) of the Finance Act, 2012 respectively giving a vast ambit for the tax authorities to bring assesses under the purview of GAAR.

In furtherance to the first condition, there is a specified condition test mentioned below, tax authorities must satisfy any one or more of the following four conditions mentioned below to invoke the provisions of GAAR:            The transaction or agreement is at non-arms length

As there are Specific Transfer Pricing Regulations67 applicable to international transactions and certain specified domestic transactions, this tainted element is to be examined only in those transactions which are not covered by Specific Transfer Pricing Regulations and where the main purpose of the arrangement is to obtain tax benefit.            There has been misuse or abuse of the provisions

It implies cases where the law is followed in letter or ‘form’ but not in spirit or ‘substance’, or where the arrangement results in consequences which are not intended by the legislation, revealing an intent to misuse or abuse the law.68            The transaction or agreement is not bona-fide

The third tainted element refers to an arrangement which lacks commercial substance or is deemed to lack commercial substance.            The transaction or agreement lacks commercial substance

In other words, it means an arrangement that possesses abnormal features. This is not a purpose test but a manner test.69

5.2.2.   Commercial Substance

Section 97 of the Finance Act, 2012 provides for circumstances under which arrangement(s) shall be deemed to lack commercial substance. However under the provisions of GAAR no clear definition of ‘commercial substance’ has been provided which further gives unrestricted powers to the tax authorities to interpret the term, resulting into a losing situation for the tax payers.70 In the US, according to the economic substance doctrine (recently codified), legitimate tax planning can work so long as the taxpayer has a business purpose for his transaction and the transaction meaningfully changes the economic position of the taxpayer apart from the tax benefits arising from the transaction.71 Hence it is recommended that the term ‘commercial substance’ should be codified so as to create certainty in taxation laws.

On the other hand Section 97(a) recognizes and at the same time codifies ‘substance’ v. ‘form’ doctrine72. It implies that where substance of arrangement(s) is different from what is intended to be shown by the form of the arrangement, then tax consequence of a particular arrangement should be assessed based on the substance of what took place. In other words, it reflects the inherent ability of the law to remove the corporate veil and look beyond ‘form’. In the US, the problems created by tax avoidance have been dealt by the legislature by codifying the economic substance doctrine.73 Henceforth it is recommended that the GAAR regime shall focus on the economic substance doctrine and introduce a test along the lines of the American experience.

If the GAAR regime in India adopts the economic substance test exclusively and does away with vague terminology like ‘abuse’ and ‘bonafide’, it will surely go a long away in establishing certainty in tax planning for business activities. Most taxpayers would be willing to accept that they should not receive tax benefits for sham transactions and for transactions that lack economic substance and are merely made to evade taxation laws.

5.2.3.   Consequence of Impermissible Avoidance Arrangement

Section 98 of the Finance Act, 2012 provides consequences in relation to tax of an ‘arrangement’, after it is declared to be an impermissible avoidance arrangement. Bare perusal of the term “including by way of but not limited to the following”74 provides for certain illustrative but not exhaustive methods for determination of tax consequences. This lack of exhaustive wordings couched in this provision made it inherently vague.

5.2.4.   Treatment of Connected Person And Accommodating Party

Section 99 provides that for determining tax benefits for the purpose of the newly inserted Chapter X-A, parties who are connected75 may be treated as one and same person; accommodating party may be disregarded; any arrangement may be treated as one and the same person and an arrangement may be looked through by disregarding any corporate structure. Hence by this provision the taxation authorities were provided with the authority to lift the corporate veil of a company.

5.2.5.   Framing Of Guidelines

As per Section 101 of the Finance Act, 2012; GAAR provisions are to be interpreted in accordance with the guidelines issued by the Central Government.

The Draft Guideline(s) issued by the Committee constituted under the Chairmanship of Director General of Income Tax (International Taxation) gave following recommendations to be included in the GAAR guidelines:            Monetary Threshold

The committee recommended embedding of a monetary threshold to invoke GAAR against any arrangement or arrangements where the tax benefit through the arrangement(s) in a year exceeds that threshold limit.76 It is in view to relieve small taxpayers from undue harassment by the taxation authorities. But the committee did not mention any specific amount.            Statutory Forms

The committee also recommended that adequate safeguards should be provided to the assessee to ensure that principles of natural justice were not violated and there is transparency in the procedures of invoking GAAR. For that the committee is of the opinion to issue prescribed statutory forms for invoking GAAR by various authorities.77            Time Limitation

The committee also recommended time limits during which various actions under the GAAR provisions are to be completed. Some of these time lines have been prescribed under the act under sections 144BA(1) and 144BA(13). For the remaining actions the committee suggested that: In terms of section 144BA(4), the CIT should make a reference to the Approving Panel within 60 days of the receipt of the objection from the assessee and in case of the CIT accepting the assessee objection and being satisfied that provision of chapter X-A are not applicable, the CIT shall communicate his decision to the AO within 60 days of the receipt of the assessee objection as prescribed under section 144BA(4) read along with section 144BA(5).78 No action under section 144BA(4) or (5) shall be taken by the Commissioner after the period of six months from the end of the month in which the reference under sub-section 144BA(1) was received by the Commissioner.79

5.2.6.   Definitions

Section 102 of the Finance Act, 2012, defines certain terms which relevant for newly inserted Chapter X-A. Here we will be discussing about those definitions which are in controversies in the public domain and which need special re-consideration by the legislature.

Concerns have been raised that the definition of ‘connected person’ defined under section 102(5) of the Finance Act, 2012 as too broad and ambiguous. The Shome Committee recommended that ‘connected person’ would include the definition of ‘associated enterprise’ given in section 92A of the Income Tax Act, 1961, read with the definition of relative in section 56 of the Income Tax Act, 1961 and the “persons” covered under section 40A(2)(b) of the Income Tax Act, 1961.80

6.      Implications of GAAR: Boon or Bane

Every discussion needs a critical analysis regarding its merits and demerits and therefore the discussion is incomplete without discussing the merits and demerits of GAAR. With this guiding principle the merits and demerits are discussed below:

6.1    GAAR: A Necessity

There are multifarious issues regarding GAAR. Several countries have codified GAAR in their tax statutes so as to check tax evasion by the assesses. GAAR has been a part of the tax code of Canada since 1988, Australia since 1981, South Africa from 2006 and China from 200881. The merits of introducing GAAR with regard to Indian perspective are as follows:

6.1.1.   Checking abuse of Double Taxation Avoidance Agreement and in turn protecting the revenue interest of India

India entered into Tax treaties with over 70 countries to ensure that the income taxed in one country is not taxed again in the other.82 Mauritius and Singapore are the most preferred jurisdiction for structuring investments into India in view of liberal business environment offered by Mauritius and the benefits available to the assesses under the India-Mauritius Tax Treaty.83 Statistical analysis of the Department of Industrial Policy & Promotion shows that more than 40% of the Foreign Direct Investment (FDI) or a whopping 62471 million US Dollar has come to India from Mauritius in the last year itself.84 Furthermore referring to the same statistical analysis we can see that FDI index has crossed two digits only with respect to those capital inflows coming from two tax heavens, viz. Mauritius and Singapore85. This heavy inflow must be for some special reason.            Certificate of Residence: essential element in determining tax upon capital-gain arising to a non-resident

While under Income Tax Act, 1961, capital gains arising to a non-resident on transfer of shares of an Indian company are generally taxable under the Indian law. However under the Tax Treaty, such gains arising to a tax resident of Mauritius or Singapore are taxable only in Mauritius and Singapore respectively. But there is no such legislation which aims to tax capital-gains neither in Mauritius nor in Singapore. To avail this benefit, the foreign Company has to prove that it is resident of Mauritius or Singapore. For that purpose of determining the residential status, CBDT issued a circular86 that a Certificate of Residence issued by Mauritius or Singapore will be sufficient evidence for accepting the status of residence as well as ownership for applying the provisions of the treaty. The above circular was, however, declared invalid by the Hon’ble Delhi High Court87 which was later reversed by the Hon’ble Supreme Court in the landmark case of Azadi Bachao88. However, the recent case of Aditya Birla Nuvo Limited v. The Deputy Director of Income-tax,89 Mumbai High Court upsets the settled legal position, and very clearly implies that if the shares of the Indian company are effectively not owned by a Mauritian company, capital gains may be charged to tax in India despite a Certificate of Residency issued by Mauritius Government.            Role of GAAR

Now the question may rise what is the role of GAAR in India. The role comes to play where there is no Limitation of Benefit article in a DTAA to prevent tax treaty abuse. Even if there is a specific LOB in a treaty, whether that would prevent the application of domestic GAAR has also been answered by both OECD Model Convention90 and UN Model Convention91. However Shome Committee recommended that where the DTAA itself has anti-avoidance provisions, such provisions should not be substituted by GAAR provisions under the treaty override provisions.92

GAAR will provide in those instances a statutory right to the tax authorities to question any transaction which is not made in ‘good-faith’. Tax treaties are usually governed by the Vienna Convention.93 The provisions of the Vienna Convention clearly emphasise that a treaty should be interpreted and must be performed by parties to it in ‘good faith’.94 Even the underlying principle of treaty shopping can come under the purview of absence of good-faith.95 The main problem with treaty shopping is that it breaches the reciprocity of a Tax treaty entered into between two sovereign nations and instead it extends the Treaty benefits meant for residents of Treaty partner countries to those of a third parties which is not signatory to the Treaty and may not reciprocate corresponding benefits. Hence the importance of GAAR to protect the revenue interest of a nation is unquestionable.

6.1.2.   Creating certainty in Indian tax regime

Canadian tax laws contain GAAR provisions since 1988. “….is intended to prevent abusive tax avoidance transactions or arrangements but at the same time is not intended to interfere with legitimate commercial and family transactions. Consequently, the new ruleestablish a reasonable balance between the protection of the tax base and the need for certainty for taxpayers in planning their affairs….” Hence the GAAR, under the Finance Act, 2012 aimed to create a certainty in taxation laws aftermath the decision of the Vodafone case. But it also needs further re-consideration before practical implementation.

6.2    GAAR: Is it really a Curse

There are many expert reports available both in electronic media and print media, which vehemently criticized the idea of introducing GAAR in India’s taxation legislation. But what we considered to be the relevant arguments against the application of GAAR in Indian scenario are mentioned below:

6.2.1.   Lack of trust factor

India is one of those elite class countries which top tax miseries around the world.96 The 2011 Trust Barometer concludes that India’s informed public has most trust in business and least trust in Government.97 These international think tanks showed that in India the government efficiency is always subject to scepticism. Hence the implementation of GAAR in present status will not only give undue advantage to AO’s over the assesses but will also lack certainty in taxation laws.

6.2.2.   Concern over FDI and FII

Another hot debated topic is whether GAAR will affect adversely over FDI and FII in India. Before providing any view it is better to differentiate both the terms and its implications over development of a countries economy.

India’s economic investments drastically increased since the landmark economic liberalisation of 1991. Since then capital inflow started to enter into various forms like Foreign Direct Investment (FDI), Foreign Institutional Investment (FII), Non-Resident Indian (NRI) and person of Indian Origin (PIO) investment. Foreign Direct Investment is one which targets a specific enterprise, with the aim of increasing its capacity/productivity or changing its management control.98 FII on the other hand flows into the secondary market, increasing the overall capital availability in the market, rather than increasing capital to a particular enterprise.99 In other words FDI is an investment that a parent company makes in a foreign country.100 On the contrary, FII is an investment made by an investor in the markets of a foreign nation.101 So on the face of it; one can say that FDI is more desirable and economically beneficial for a Nation compared to FII.

Now the question is if the government tries to bring this FII under the purview of tax legislation and that to those transactions which are not made for bona-fide purpose then why such a hue and cry is being made. Though the AO must not unnecessarily harass a genuine tax payer but that does not mean that AO cannot question a transaction or arrangement solely made for tax evasion.

7.      Recommendations

It is no doubt that the introduction of the GAAR in the present form is likely to create uncertainty about the tax implications of various business and non-business transaction(s)/ arrangement(s). This would not only create undue hardships for the tax payers but such provisions could even create a negative environment against the efforts of increasing domestic as well as foreign inward investments and fear have been proved to be true.

The moot question which arises is whether, at the stage when the developing countries are trying their level best to attract FDI as well as when there is a economic slowdown, the approach of introducing the GAAR in the Indian taxation regime is correct or whether it is better to adopt a targeted approach and expand the scope of SAARs. Another question is in line of the Vodafone judgment; whether the GAAR, under the Finance Act, 2012 is certain for the taxpayers? The Supreme Court in Vodafone’s case observed that Foreign Direct Investment (FDI) “flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works. Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws. Furthermore we would like to consider Graham Aaronson’s (Queens Council) recommendation to the Government of UK for the introduction to the UK tax system a narrowly focused GAAR, discussed in details in Part-IV of this paper.102

The recommendations have therefore been based upon the above circumstances so that the Indian GAAR is not treated as toothless tiger or as a draconian law:

7.1.   Recommendations in terms of general approach to be taken for implementation of GAAR

This sub-part will only deal with the outer-structure of GAAR, leaving aside recommendations on specific provisions of Chapter X-A, of Finance Act, 2012 for the later sub-part.

7.1.1.   Deferring implementation of GAAR

The most effective safeguard that needs to be introduced before implementing GAAR is changing the mindset and developing a clear view about its functionaries among tax authorities.

As long as the Government is faced with major dependence on revenue collections to meet its budgetary obligations (as India usually have deficit budget) and the target fulfillment remained the most important criteria for appraising officers, it cannot be expected that GAAR will not be invoked against genuine, bona fide commercial transaction(s)/ structure(s). Even the Shome Committee acknowledged the same problem and accepted the fact that indeed a significant trust deficiency is there in the eyes of Assesses for the Assessing Officers and which need to be eliminated.

In view of the above situation the Committee recommended that: “concerted training programmes should be initiated for all AO’s placed, or to be placed, in the area of international taxation, to maintain officials in this field for elongated periods as in other countries, to place on the intranet details of all GAAR cases in an encrypted manner to comprise an additive log of guidelines for future application”103. Further the Committee also recommended that: “It may also be perspicacious as indicated above, for Govt. to postpone the implementation of GAAR for three years with an immediate pre-announcement of the date to remove uncertainty from the minds of stakeholders”104.

But considering the government spontaneity and efficiency in India, time period of less than five years for educating the AO’s and developing database as recommended by the Shome Committee, will be of no use and will only add to undue harassment to the assesses.

7.1.2.   GAAR should be implemented in a narrow manner

As mentioned earlier that there are certain instances, where the Indian judiciary has effectively applied the existing SAAR provisions to counter tax avoidance as and when it felt necessary to do so. This approach was balanced and found to be effective and solved the issues in effective manner providing the desired certainty mentioned in the Vodafone judgment.

Shifting our view to what Aaronson group of UK recommended for their own country, standing in state of economic uncertainty and financial crisis. Aaronson stated that “A general anti-abuse rule narrowly targeted to deter such schemes, while not affecting responsible tax planning, should lead to a fairer, more principled and ultimately simpler tax system and I strongly recommend that such a rule should be introduced into our tax laws”105.

Hence it can be ascertained that GAAR in UK will be drafted in a narrow manner so as to bring only ‘Tax Evasion’ under its purview not ‘Tax Planning’. The main proposal that attracted our attention is stated in the Group report which stated that, “In many overseas GAARs, and indeed in many of the UK’s specific anti-avoidance rules, the approach has been to target arrangements which have the sole or main purpose of achieving a tax advantage….I do not consider this to be the right approach for a GAAR that is suitable for the UK tax regime. The insuperable problem is that the UK tax rules offer, and indeed in many instances positively encourage, the opportunity for taxpayers to reduce their tax liability. Taking advantage of this can be described as a form of tax avoidance, but clearly it is not something to be criticised and therefore it should not be counteracted by a GAAR106. Hence if a developed country can be cautious of investors’ sentiment and can be highly concerned of creating certainty in taxation statue, why India shall be an exception? Hence the arbitrary power of AO’s in GAAR legislation in India shall be reduced and shall be allowed to implement them as and when it becomes imminent necessary to invoke.

In view of the above discussion it is recommended that the Government should notify the types of arrangements which are to be considered as tax avoidance arrangement(s). The proceedings for invoking GAAR provisions should be permitted to be initiated only in the case of such notified types of arrangement(s). This shall be made subject to modifications based upon the necessity.

7.2.   Recommendations on draft legislation

In addition to the general suggestions mentioned above we have tried to give certain specific suggestions upon specific provisions in this sub-part. But this part shall be read with all the recommendations made in Part-V to

give a complete image upon GAAR and its implications.

7.2.1.   ‘Main purpose’ and not ‘one of the main purposes’

In the original version of GAAR in DTC 2009 and DTC 2010, the purpose test required that the main purpose of the arrangement was to obtain tax benefit. However, the GAAR provisions introduced through Finance Act, 2012 provides that the main purpose of GAAR is to obtain tax benefit. Though initially only those arrangements were covered under GAAR where the sole predominant purpose was to obtain tax benefit which has been diluted in the recent version of GAAR and made it wider in application by inserting the term ‘one of the main purposes’. This will not only give unfettered power to the tax authority but will increase the chance of vexes allegations of tax evasion for genuine tax payers.

7.2.2.   GAAR to support LOB provisions, not to override it

The GAAR provisions should not override treaty provisions, where a specific LOB clause exists in the tax treaty or LOB conditions are specified through Protocol or Memorandum of Understanding. In such cases denial of benefits should be governed by the LOB clause. GAAR should only support LOB, but where there is a specific LOB, GAAR shall not be invoked.

7.2.3.   More than that if shifting onus

With the Amendment of the Finance Act, 2012 onus of initiating and demonstrating that there is an impermissible avoidance arrangement is shifted upon the Revenue. It is recommended that the Rules should mention that the AO needs to inform the taxpayer of his finding along with the information he possesses and his detailed reasons thereof, instead, of merely asking the taxpayer as to why a particular arrangement should not be treated as impermissible.

7.2.4.   Exclusion from the purview of GAAR

It is also recommended in line of the Shome committe that where a Foreign Institutional Investor (FII) chooses not to take any benefit under an agreement entered into by India under Section 90 or 90A of the Act and subjects itself to tax in accordance with the domestic law provisions, then, the provisions of Chapter X-A shall not apply to such FII or to the non-resident investors of the FII.107 This will stop undue harassment upon genuine tax payers.

8.      Conclusion

Considering the cumbersome litigation process and pro-litigation mindset of both, the taxpayer and the Revenue officers, GAAR might end up in triggering more hardship and defeat the main objective to create a certainty in taxation laws in India. After prolonged discussion on this topic the most fundamental question is whether India really needs GAAR and why can’t the current system of judicial rulings and SAAR not suffice.

Indian Judiciary is a complex and slow process, the litigation pendency in India is really the largest democratic nation of the World. Keeping this in mind, seeking judicial intervention in every matter of tax evasion, and application of domestic taxation laws in transactions made outside India, will not only create an uncertainty in taxation laws but will delay the fruit of justice to genuine tax payers. On the other hand it cannot be expected for Indian legislature to foresee what is going to be the process of tax evasion day after tomorrow, so codifying Specific Anti-Avoidance Rule every alternate day is a time consuming process which is also at the same unrealistic in terms of implementation. Therefore, the complimentarity of GAAR and SAAR is the need of the hour and both tax payers and tax authorities should accept this ground reality. A sovereign nation cannot tolerate exploitation of its DTAA treaties and domestic laws by assesses. So GAAR will provide the tax authorities with the power to tax those transactions or arrangements which are made for tax evasion purposes, however genuine tax planning is always recommended to be kept under the purview.

Lastly before winding up this paper, we would like to highlight some statistical analysis. Since 2007, when India was ranked 72 among 180 countries in Transparency International’s Corruption Perception Index (CPI) with a score of 3.5, the score has declined, so had the rankings. As of 2011 India slipped to 95the rank in Transparency International’s Corruption Perception Index. This clearly shows that accountability in India is on increasing graph and so we can hope that this will help to eradicate the major doubt of implementing GAAR, i.e. concern over undue harassment by tax authorities.

Ultimately through Vodafone judgment, India unambiguously adopted ‘substance’ over ‘form’ approach and it further deepened its roots though GAAR. Sooner or later GAAR will be implemented; its implementation is only a matter of time. So it will be interesting to watch whether the flow of FDI and FII will really be affected with the introduction of GAAR. Another interesting point will be how the tax authorities will deal with GAAR provisions because ultimately the success of this legislation lies in their hands. Unlike other jurisdictions Indian GAAR is introduced to deter defaulters and improve tax compliance. Hence the motive is fair but will the implementation procedure really follow this fair motive? Time will find an answer to all these questions.



1.      Abrams, Howard E., and Richard L, Doernberg, Essentials of United States Taxation, The Hague: Kluwer Law International, 1999.

2.      Kanga, J. B., N. A. Palkhivala, Dinesh Vyas, and Nandish Vyas, The Law and Practice of Income Tax, Gurgaon: Lexis Nexis Butterworths Wadhwa Nagpur, 2004.

3.      Panayi, Christiana, Double Taxation, Tax Treaties, Treaty shopping and the European Community, The Hague, The Netherlands: Kluwer Law International, 2007.

4.      Rohatgi, Roy, Basic International Taxation, London: Kluwer Law International, 2002.


1.      Andrew Gotch, An UK perspective on the Ramsay Approach and Vodafone, International Taxation, [2012] 6 International Taxaton.

2.      Craig Elliffe, International tax avoidance – the tension between protecting the tax base and certainty of law, 6 Journal of Business Law 2011.

3.      Dheeraj Chaurasia & Parul Sarin, GAAR in the UK – A Carefully planned approach, International Taxation Journal, [2012] 7.

4.      Neumayer, Eric, Do double taxation treaties increase foreign direct investment to developing countries?, Journal of Development Studies, London School of Economics and Political Science (LSE), 43 (8).

5.      Praveen Boda, GAAR and its implementation, Taxmann’s Corporate Professionals

Today, [2012] 24 Corporate Professional Today.

6.      S. Rajaratnam, Vodafone case- A Welcome Decision, [2012] 23 Corporate Professionals Today,.

Articles Available Over Internet

•       “Lead Article”, PWC, available at

•       2011 Edelman Trust Barometre, available at

•       Aaronson recommends ‘narrowly focussed’ GAAR, available at

•       Abhishek Kumar and Karandeep Makkar, Introduction of GAAR in India: Callous or indispensable, available at

•       Difference Between FDI and FII, available at Difference Between FDI and FII | Difference Between | FDI vs FII, available at

•       Do you know the difference between FDI and FII? available at

•       Drew Hasselback , Supreme Court clamps down on use of tax loopholes, available at

•       Edward John Snape, “Public Law and Public Management: ‘Theory’ and ‘Values’ in Corporation Tax Reform, Birmingham Law School”, The University of Birmingham, April 2008, p. 56, available at

•       General Anti Avoidance Rule, the PRS Blog, available at

•       General Anti-Avoidance Rule (GAAR), HM Treasury, available at

•       General anti-avoidance Rule (‘GAAR’) in India KPMG, available at

•       India: Holding Company Planning for Holding Investment, International Tax Review, available at

•       Keith Kendall, “Tax Avoidance in Australia, La Trobe University”, ConTax Student e-Newsletter, September 2009.

•       Mark Friezer, Australia to reform its General Anti-avoidance regime, International Tax Review, available at         

•       Mary Swire, “Australia to clarify GAAR”, Global Tax News, available at

•       Nigam Nuggehalli, Nigam Nuggehalli: Who will guard the GAAR?, available at

•       Philip Baker, Tax Avoidance, Tax Evasion & Tax Mitigation, available at

•       Raghuvir Srinivasan, Sweating over GAAR, The Hindu, available at

•       Removing the fences looking through GAAR, Price Water House Cooper, February 2012, available at

•       Reuven S. Avi-Yonah & Christiana Hji Panayi, Rethinking Treaty-Shopping Lessons For The European Union, Michigan Law University, available at

•       S.S.Khan, The Crux of Mauritius Tax Treaty, available at

•       Stewart Grieve, Announced Changes to the Australian GAAR, Corrs Chambers Westgarth, availabl at

•       Tambet Grauberg, “Anti-tax-avoidance Measures and Their Compliance with Community Law”, available at

•       Tax Planning and Ethics in Taxation, Institute of Chartered Accountants of India, available at

•       Vidrum Mehta, Understanding the GAAR Effect, available at

•       What is General Anti Avoidance Rule (GAAR)?, Jagran Josh, available at

[Source: Best Research Paper of 8th Nani Palkhivala Research Paper Competition]

1       Neumayer, Eric, “Do double taxation treaties increase foreign direct investment to developing countries?” Journal of Development Studies, London School of Economics and Political Science (LSE), 43 (8). P.1503.

2       “According to this, a person cannot rely on recourse to the law when he in bad faith aspires to gain benefit from the exercise of his subjective right”, Tambet Grauberg, “Anti-tax-avoidance Measures  and Their Compliance  with Community Law”, p. 142, available at

3       See general, Removing the fences looking through GAAR, Price Water House Cooper, February 2012, available at [hereinafter Removing the fences]

4       See Id.

5       Sections 2(22)(e), 60, 61, 64, 94, Explanation 3 to section 43(1), Explanation 4A to section 43(1), sections 56(2)(vii), 56(2)(viia), 40A(2) of the Income Tax Act, 1961, see Id. at p.11.

6       Direct Tax Code 2009: An Analysis, September 2009, Rashmin Sanghvi & Associates, available at

7       Vodafone international v. UOI, (2012) 1 UJ 128. [hereinafter Vodafone]

8       Commissioner of Income-Tax v. A. Raman & Company, AIR 1968 SC 49 [hereinafter A. Raman]; McDowell and Co. Ltd. v. Commercial Tax Officer, (1985) 47 CTR (SC) 126 [hereinafter McDowell]; Union of India & Anr. v. Azadi Bachao Andolan and Anr, [2003] 263 ITR 706 (SC) [hereinafter Azadi Bachao]; Inland Revenue Commissioners v. Duke of Westminster, (1935) All ER 259.; W. T. Ramsay v. Inland Revenue Commissioners, 1982 AC 300; Furniss v. Dawson, (1984) 1 All ER 530; Astall & Anor v. Revenue and Customs, [2009] EWCA Civ. 1010.

9       “Many civil  law  countries  apply  the  Roman  law  doctrine  of fraus legis.  A good example is The Netherlands.  Fraus legis resembles the business purpose rule.  Under  this,  the  Court  disregards  any  transaction  entered  for  tax avoidance  purposes  and substitutes  it by  a  ‘normal’ transaction.” T. P. Ostwal and Vikram Vijayaraghavan, “Anti-Avoidance Measures”, 22 Nat’l L. Sch. India Rev. 73 (2010). [hereinafter T. P. Ostwal]

10     See Id.

11     See Id.

12     CIT v. R. K. Abubcker, [2004] 135 Taxman 77 (Mad.); Om Sindhoori Capital Investments Ltd. v. Jt. CIT [2002], 80 ITD 514 (Chennai); VVF Ltd. v. Dy. CIT [IT Appeal No. 673 [Mum. Of 2006, dated 8-1-2010].

13     The Organisation for Economic Cooperation and Development (OECD) has defined tax evasion as “A term that is difficult to define but which is generally used to mean illegal arrangements where liability to tax is hidden or ignored, i.e. the taxpayer pays less tax than he is legally obligated to pay by hiding income or information from the tax authorities.” Glossary  of Tax  Terms,  available at; Justice Reddy called  it the  “art of dodging tax without breaking the law”, McDowell v. Commercial  Tax  Officer,  (1985)  154  ITR 148  (Supreme Court  of India); “any  one may  arrange his  affairs  that  his  taxes shall  be  as  low  as  possible; he  is  not  bound  to choose that pattern  which will best  pay the Treasury;  there is not even  a patriotic duty to increase one’s  taxes”, Helvering  v. Gregory,  69 F.2d.  809  (2d  Cir. 1934).

14     OECD has defined tax avoidance as, “term used to describe an arrangement of a tax payer’s affairs that is intended to reduce his liability and that although the arrangement could be strictly legal it is usually in contradiction with the intent of the law it purports to follow”, Glossary  of Tax  Terms,  available at; Tax evasion on the other hand is the “unlawful escaping of tax liabilities”, Royal  Commission  on Taxation  of  Profits  and  Income,  UK,  1955.

15     (2012) 6 SCC 719 ¶ 281.

16     (1926) AC 396.

17     Tax Planning and Ethics in Taxation, Institute of Chartered Accountants of India, available at

18     [1985] 154 TR 148.

19     Philip Baker, Tax Avoidance, Tax Evasion & Tax Mitigation, available at

20     (1935) All ER 259.

21     See Id.

22     Andrew Gotch, An UK perspective on the Ramsay Approach and Vodafone, International Taxation, [2012] 6 International Taxaton 168.

23     1982  AC  300. 

24     W.T. Ramsay v. Inland Revenue Commissioners,1982 AC 300 was  a  significant departure  from  the  Westminster principle. In  the  instant  case,  the  House  of Lords considered a  tax  avoidance  scheme  which consisted  of a  series  or  a  combination  of  transactions  each of which  was  individually  genuine  but  all  of which  as a whole  resulted  in  tax  avoidance. The House  laid  the  principle  that  the fiscal  consequences  of a  preordained  series  of transactions, intended  to  operate  as  such,  are  generally  to  be  ascertained  by  considering  the  result  of the series  as a  whole.  It  is  not  to  be  ascertained  by  dissecting  the scheme  and  considering  each individual  transaction  separately.  The  dictum  in  Ramsay  was  echoed  in Inland Revenue Commissioners v.  Burmah Oil  Co.  Ltd, 1982  STC 30, HL(SC) and  Furniss v. Dawson, (1984) 1 All ER 530. However,  the  legality  of Westminster principle was  reaffirmed  in  subsequent  cases  such  as  Craven v.  White, (1988)  3 All  ER 495 and  MacNiven  (Inspector of Taxes)  v. Westmorland Investments Ltd, (2001) 1 All ER 865.

25     Furniss v. Dawson, (1984) 55 TC 324.

26     Edward John Snape, “Public Law and Public Management: ‘Theory’ and ‘Values’ in Corporation Tax Reform, Birmingham Law School”, The University of Birmingham, April 2008, p. 56, available at

27     (1988) 3 ALL ER 495 (HL).

28     See Id.

29     S. Rajaratnam, “Vodafone case- A WELCOME DECISION”, [2012] 23 Corporate Professionals Today, 27.

30     MC Dowell, supra note 8; Azadi Bachao, supra note 8.

31     MC Dowell, supra note 8.

32     Azadi Bachao, supra note 8.

33     A. Raman, supra note 8.

34     (1999)8 SCC 667.

35     (1969) 72 ITR 603 (SC).

36     Ensign Tankers (Leasing) Ltd. v. Strokes (1991) 1 AC 655; MacNiven v. Westmoreland Investments Ltd. (2003) 1 AC 311.

37     T. P. Ostwal, supra note 9 at 78.

38     Keith Kendall, “Tax Avoidance in Australia, La Trobe University”, ConTax Student e-Newsletter, September 2009, p.2.

39     See Id.

40     See general, “Lead Article”, PWC, available at [hereinafter Lead Article]

41     Mary Swire, “Australia to clarify GAAR”, Global Tax News, available at

42     Mark Friezer, Australia to reform its General Anti-avoidance regime, International Tax Review, available at

43     Stewart Grieve, Announced Changes to the Australian GAAR, Corrs Chambers Westgarth, availabl at

44     Lead Article, supra note 40 at 8.

45     Removing the fences, supra Note 3.

46     Abhishek Kumar and Karandeep Makkar, Introduction of GAAR in India: Callous or indispensable, available at

47     2011 SCC 63.

48     Drew Hasselback, Supreme Court clamps down on use of tax loopholes, available at

49     Craig Elliffe, “International tax avoidance – the tension between protecting the tax base and certainty of law”, 6 Journal of Business Law 6 2011.

50     Section 7701(o) of the Internal Revenue Code, 1986 (US) introduced the United States first GAAR, effective March 30, 2010. It applies to “any transactions to which the economic substance doctrine is relevant”.

51     General Anti-Avoidance Rules India and International perspective, Deloitte, p. 23, available at

52     Antony Seely, Tax avoidance : a General Anti-Avoidance Rule (GAAR) – Commons Library Standard Note,  available at

53     Dheeraj Chaurasia & Parul Sarin, “GAAR in the UK – A Carefully planned approach”, International Taxation Journal, [2012] 7 pp. 9-12.

54     See Id.

55     General Anti-Abuse Rule (GAAR), HM Treasury, available at

56     Praveen Boda, GAAR and its implementation, Taxmann’s Corporate Professionals Today, [2012] 24 Corporate Professional Today 13.

57     Vodafone, supra note 7.

58     What is General Anti Avoidance Rule (GAAR)?, Jagran Josh, available at

59     See general, General anti-avoidance Rule (‘GAAR’) in India KPMG, available at

60     Section 96 (1) of the Finance Act, 2012.

61     General Anti Avoidance Rule, the PRS Blog, available at

62     Section 96 of Income Tax Act, 1961.

63     The term arrangement has been defined in section 102 (1) of the Finance Act, 2012 as , “arrangement means any step in, or a part or whole of, any  transaction, operation, scheme, agreement or understanding, whether enforceable or not, and includes the alienation of any property in such transaction, operation, scheme, agreement or understanding”.

64     Section 96, supra note 62.

65     GAAR in Direct Tax Code Bill, 2010 states “”Impermissible avoidance arrangement” means a step in, or a part or whole of, an arrangement, whose main purpose is to obtain a tax benefit”, whereas GAAR in Finance Act, 2012 states, “An impermissible avoidance arrangement means an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit”.

66     ANNEXE 1. COMPARISON OF GAAR 2009-12, available at

67     OECD introduces the transfer pricing guidelines for multinational enterprises and tax administrations in 1995. OECD guidelines are appreciated globally. Accordingly, the Finance Act, 2001 introduced law of transfer pricing in India through sections 92A to 92F of the Indian Income-tax Act, 1961 which guides computation of the transfer price and suggests detailed documentation procedures; transfer pricing arises where there is shifting of profit from a high tax jurisdiction to a low tax jurisdiction, Gyaneshwarnath Gowra, “Trasnfer Pricing: Mauritius Story”, [2012] 7 International Taxation 82.

68     Report on General Anti Avoidance Rules (GAAR) in Income-tax Act, 1961, Expert Committee, 2012, p. 23. [hereinafter Shome Committee Report]

69     See Id.

70     Vidrum Mehta, Understanding the GAAR Effect, available at

71     Nigam Nuggehalli, Nigam Nuggehalli: Who will guard the GAAR?, available at [hereinafter Nigam Nuggehalli]

72     Gregory v. Helvering, 293 U.S. 465 (1935).

73     Nigam Nuggehalli, supra note 71.

74     Section 98 of the Finance Act, 2012.

75     “Connected person” means any person who is connected directly or indirectly to another person and includes associated person. The definition of connected person in Finance Act, 2012 is much more comprehensive compared to DTC, 2010.

76     “In view of the above, the Committee recommends that a monetary threshold of Rs  3  crore of tax benefit (including tax only, and not interest etc) to a taxpayer in a year should be used for the applicability of GAAR provisions. In case of tax deferral, the tax benefit shall be determined based on the present value of money”, Shome Committee Report, supra note 68 at pp. 45-46.

77     Shome Committee Report, supra note 68 at p. 32.

78     See Id.

79     See Id.

80     Shome Committee Report, supra note 68 at p. 29.

81     Raghuvir Srinivasan, Sweating over GAAR, The Hindu, available at

82     S.S.Khan, The Crux of Mauritius Tax Treaty, available at

83     India: Holding Company Planning for Holding Investment, International Tax Review, available at

84     Fact Sheet On Foreign Direct Investment (FDI) from April 2000 to December 2011, available at

85     See Id.

86     Circular No.789 dated 13.4.2000.

87     Shiv Kant Jha v. Union of India (2002) 256 ITR 563

88     Azadi Bachao, supra note 8.

89     2011 (44) SOT 601.

90     “LOB can usefully supplement a domestic GAAR”, Removing the fences, supra note 3 at p. 27.

91     “LOB may not provide a comprehensive solution. In case LOB deals with specific abuse (say conduit entities), then the domestic GAAR may also apply to prevent other abuses, not covered by the treaty”, Removing the fences, supra note 3 at p. 27.

92     Shome Committee Report, supra note 68.

93     Vienna Convention on the Law of Treaties was signed in Vienna on 23 May 1969 and entered into force on 27 January 1980.

94     See general, Preamble of Vienna Convention, Article 18, Article 26, Article 27, Article 31, Article 46 Vienna Convention on the Law of Treaties, U.N. Doc. A/CONF.39/27, Art. 31(1), (1969).

95     See general, Reuven S. Avi-Yonah & Christiana Hji Panayi, Rethinking Treaty-Shopping Lessons For The European Union, Michigan Law University, available at

96     2009 Tax Misery & Reform Index, available at

97     See general, 2011 Edelman Trust Barometre, available at

98     Do you know the difference between FDI and FII? available at

99     See Id.

100 Difference Between FDI and FII, available at Difference Between FDI and FII | Difference Between | FDI vs FII, available at / business / difference-between-fdi-and fii/#ixzz25tcrb53G.

101  See Id.

102 Independent study on general anti-avoidance rule published, available at

103 Shome Committee Report, supra note 68 at 55.

104 See Id.

105 Aaronson recommends ‘narrowly focussed’ GAAR, available at

106 Report by Graham Aaronson QC, Gaar Study, pp. 30, 31, available at [hereinafter Report by Aaronson]

107 Report by Aaronson , supra note 106 at p. 53.

This Paper was awarded the “Best Research Paper” at the Nani Palkhivala Memorial National Tax Moot Court Competition held on 13.10.2012. Reproduced with permission from AIfTP Journal, October 2012

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of
5 comments on “Why This GAAR?
  1. Dr. Mike says:

    Excellent, article..authors appreciated the subject properly. The refence of UK Gaar is very comprehensive.

  2. CA Ravindra R. Manek says:

    Nice and comprehensive giving an wholistic view.

  3. Atul T Suraiya says:

    The word “GAAR” in gujarati language means “abuse” – in Hindi we say “gaali”! Was the draftsman aware of what he is drafting? Was he referring to the abuse of the law by the taxpayer, which leads to the consequences laid down, or was he referring to the abuse of power used to prescribe the law?

  4. Sitaram Agarwal says:

    I have worked in England for about fifteen years for Indian international reputed conglomerate in England. I am totally against GAAR. GAAR is nothing but to hide the weak drafting of laws, poor budget planning, corrupt bureaucrats and greed of government resulting into excessive tax from honest tax-payers. This has resulted flight of Indian investors abroad. Under globalization labour and capital are mobile and it will move to place it can get best reward/return. The curse of the problem in India is absence of long term, stable and consistent tax laws of global level. The amendment of law form retrospective effect is worst.

    Sitaram Agarwal, B.Com., LL.B., LL.M (Bristol, England), FCS., FCA (Cost Accountant).

  5. kiranwaljee says:

    An excellent, educative, informative, lucid and fine piece of article.

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