GENERAL ANTI AVOIDANCE RULE

SUMIT GUPTA
*
& ALOK MOHAN SHERRY

ABSTRACT
General anti avoidance rule (GAAR) has been in the lime light for all its advantages and
disadvantages. Its a conundrum which seriously needs attention for as the policy-paralyzed
government has given nothing to cheer about in the budget and has exuberated the scenario
with skepticism amongst the stakeholders. The necessity for GAAR is climacteric cusp for tax
system of many countries for several rationalities. However, amongst the investors, there is a
dearth of knowledge about the same. It has posited with all the stakeholders that GAAR
implementation will have an adverse impact on the overall markets. In making a strong
foundation of this discussion it is important to acknowledge the contribution of all well informed
stakeholders. As a prudent researcher and an academician, efforts of this paper proposes a vital
contribution which would be largely in the national interest as well as to the subject. This paper
has made efforts in addressing the quandaries that we have in formulating the Rule.

Keyword: GAAR, Tax evasion, Tax avoidance, Tax mitigation
JEL Classification: M41, M48

1. Introduction
Emerging economies especially like India,
is a heaven for investors because of its
various attributes like growth potentials.


*
Participant of Post Graduate Program in Financial Markets, National Institute of Financial Management
(An autonomous institute of Ministry of Finance, Government of India), Faridabad, Haryana, 121001;
eMail: sumit.11.gupta@gmail.com

Professor (Finance and Accounts), National Institute of Financial Management (An autonomous institute
of Ministry of Finance, Government of India), Faridabad, Haryana, 121001; eMail: amsherry@nifm.ac.in
However, incumbency of our leaders in the
system is making the investors nervous
which can result to further make the
economic growth more sluggish. Hence, it
becomes important to look into the subject
1

from all prospective before making it Law.
With the increasing globalization and
money changing hands across boundaries
few governments were able to introduce
legislation which has empowered the
Revenue Authorities to examine the nature
of transactions and arrangement. They are
also imputed to disregard any transaction
and arrangement and deny tax benefit to
the taxpayer if the commercial substance is
not embedded with the transaction.
However, different approaches has been
adopted by different nations. Like Australia,
the pioneers to introduce GAAR in 1981
followed by other matured markets like
Canada, New Zealand, Germany, France
and South Africa. Emerging economies
have also started introducing GAAR with
the phenomenal growth of their economies.
However, nations like USA and UK have
taken a vigilant approach.
1.1 Specific Anti-Avoidance Rule
Emerging economy like India has got
provisions to impose restrictions to such
kind of transactions and arrangements
which is known as Specific Anti-Avoidance
Rule (SAAR). SAAR by its nature has got
its own set of pros and cons in the domestic
tax laws. Furthermore, SAAR in its present
has limitations which has compelled the
Government to formulate a concrete and
strong sets of rule to gap up the lunacies.
Following the footsteps of matured
economies the government has proposed
to introduce General Anti-Avoidance Rule
(GAAR) through the Direct Taxes Code
(DTC) which will be the remedy to end this
chaotic state. After the introduction of the
Direct Tax Code Bill, 2010 in the parliament
was further benched to the Standing
Committee of the parliament. The Standing
Committee doing justice to the draft have
made efforts to learn the views,
suggestions and recommendations of
various stakeholders.
1.2 Objective of GAAR
The objective of this paper is confined to
the analysis of GAAR provisions in the
Code accompanied with suggestions and
recommendations proposed in the
introduction of the GAAR. Tax which is one
the most sophisticated means of revenue
collection rights of the Government which
helps in the development of many macro
and micro economic factors needs to center
stage the basic idea of exploitation of the
taxpayer is means to economic growth.
Thus it becomes important to identify and
introduce specific measures that would
restrict taxpayers from entering such kind of
arrangements and transactions. The
famous verdict of Supreme Court in the
Vodafone ruling has undoubtedly given a
plenty of work to the policy makers and tax
authorities which acknowledged that
strategic tax planning. This verdict was
2

certainly welcomed by all as we know that
India with its growth potentiality has
become paragon for investments for
multinational corporations (MNCs).
Therefore, certainty in its tax policy and
statute has become awfully essential. The
sobriety in articulation of the GAAR
requires material discussion amongst the
stakeholders before it gets penned. Taking
lessons from the countries who have
implemented GAAR have taken substantial
time in its stabilization. Having said that it
becomes certain that the stakeholders
need awareness on the subject to keep
themselves away from any unforeseen
scenario which can further result to
unfavorable consequences. Hence
restating the objective of this paper which
in its all form is drafted to educated and
address the quandaries of impact of GAAR.
Do we know how GAAR can impact us?
2. BACKGROUND Shome Committee
(2012)
With all this long discussions and debates,
it has become certain that we are
addressing a conundrum which is GAAR.
The provisions and the policies that needs
to be structured and needs to undergo a lot
of regression before it comes on the table.
Hence, here it makes it important for us to
mention a little about the evolution of GAAR
and what exactly had brought such a thing
into lime light.
As observed by Justice S.H.Kapadia in
Vodafone International Holdings V. Union
of India [2012], where he rightly mentions
that the concept of GAAR is not new to
India since India already has the anti-
avoidance rule, like some other
jurisdictions. Lack of clarity and absence of
appropriate provisions in the statute and/ or
in the treaty regarding the circumstances in
which judicial anti-avoidance rules would
apply has generated. The present Prime
Minister Mr. Manmohan Singh concerned
with these issues finally approved the
constitution of an Expert Committee on
GAAR to finalize the guidelines of GAAR. It
was also recommended that the committee
would formulate the guide after detail
consultation with the stakeholders.
Dr. Parthasarathi Shome was appointed as
the Chairman of the Committee along with
three other members and to name them
first was Shri N Rangachary, former
Chairman of IRDA, second was Dr. Ajay
Shah, Professor at NIPFP and lastly was
Shri Sunil Gupta, Joint Secretary, Tax
Policy & Legislation, Department of
Revenue.
Committee was formulated to function
within a particular time frame as well as
department of revenue were asked to
extend every kind of support to the
committee in order to achieve excellence in
their work. Committee was asked to take
3

feedback from the stakeholders and
general public on the guidelines published
by the government on their website and this
became the base of their framework. Next
was to analyze the feedback and
incorporate the changes and publish the
second draft to undertake widespread
consultation on the guidelines. Last step is
to finalize the GAAR guidelines and a
roadmap for implementation and submit the
same to the Government. As per the recent
announcement by finance minister GAAR
would be effective from the Assessment
Year 2016 2017. Some of the recent
developments in GAAR are that on 16th
March, 2012 Finance Minister, Mr. Pranab
Mukherjee announces that applicability of
GAAR would become effective from the
fiscal year 2012-2013. On 28th June, 2012
Finance Minister releases the first draft on
GAAR which had to face a lot of criticism
and because of which on 14th July, 2012
Prime Minister, Dr. Manmohan Singh forms
a review committee under Parthasarthi
Shome for preparing a second draft on the
same by 31st August, 2012 and the final
guidelines for GAAR by 30th September,
2012. This intervention actually widened
the scope of discussion as it wanted the
draft to be more investor friendly and thus
on 1st September, 2012 Shome committee
recommended to defer the GAAR by three
years. Eventually on 14th January, 2013
Government of India accepted the
recommendation of the Shome committee
and decided to defer the same for two years
which will now be effective from the year
2016-2017.
3. Literature Review
GAAR is a simple rule which allows the
Indian tax authorities to levy tax if the
transactions done are impermissible
avoidance arrangements. The term
impermissible avoidance arrangements
comprises two tests:
First Test is to obtain Tax Benefit
Second Test is the Specified condition test,
which are as follows:
When there has been maltreatment
of the provision or
When the arrangement is non-arms
length or
When the transaction not veritable or
When there is a lack commercial
substance.
To make the above points explanatory one
should avoid any sort of arrangement which
is not instituted by commercial purpose and
it has been conducted solely with the
objective to avail tax benefit. Thereby such
sort of arrangements needs to be
supported with enough evidences which
depicts its commercial viability.
4

Another area where we also need to focus
on is that the Finance Act (year) has not
provided any distinct definition or literature
in the articulation for the maltreatment of
the provision. The guidance is opaque as to
what the misuse and abuse of the
provisions mean. Hence, proper business
logic and proof should be documented to
evade any such situation. A transaction
which is done at arms length would also
come under the purview of GAAR. Present
draft of GAAR provisions has failed in
clearly defining commercial substance
and decision to classify an arrangement
vests in the hands of the tax authorities
which bestows them with immense powers
which could result in the exploitation of the
tax payers. The provisions made under
GAAR still do not have much clarity but may
impact many companies. This has led to
creating negative sentiments in the
environment. Its important that the
decisions taken today will be a troublesome
or a benefit can only evaluated with a
fundamentally strong law which has distinct
and clears guidelines which can be well
interpreted by both, the stakeholders as
well as by tax authorities. Draft needs to be
transparent with the objective to bringing
both the stakeholders and tax authorities at
a common platform were all the clauses
can be dealt with common understanding.
Since us being an attractive destination for
investments it becomes crucial to stabilize
the tax policies with complete
transparencies. Uncertainty forces the
money to flow out of our economy as
Foreign institutional investors, which were
the net buyers in the initial months of 2012,
starting selling with the news of uncertainty.
Every new and better provision or clause
must work towards benefitting the economy.
3.1 General Anti-Avoidance Rules
Overview
General Anti-Avoidance Rule (GAAR)
introduced by the Finance Act, 2012 is
articulated to abnegate tax treaty benefits
to non-residents taxpayers who would
unconventionally use treaty for the
personal benefit. GAAR in India would be
applicable to all those arrangements which
has its main purpose to avail tax benefit and
lack of commercial substance or done at
arms length or the transaction is bona-fide,
etc. would be proscribed arrangement on
which the tax authorities will deny the tax
payer the tax benefit. The tax consequence
of such impermissible shunning transaction
will be dealt by the revenue authority of
India (IRA). Tax avoiding by law in an
inappropriate manner which does not have
any commercial purpose come under the
purview of GAAR and the tax authority will
consider this act as tax evasion. Tax
evasion in all sense of law is considered to
be illegal and consequences are severe.
5

3.2 Methods to Tax
As very rightly quoted by Lord Tomlin,
Every man is entitled to order his affairs so
that tax attaching under appropriate Acts is
less than it otherwise would be (IRC v
Duke of Westminster. Hence taxpayer use
different means to reduce their tax liability.
Methods adopted can broadly be classified
into four categories like Tax evasion, Tax
avoidance, Tax mitigation and Tax planning.
Tax mitigation is taking deliberate
advantage of tax laws. Its situation wherein
the tax payer takes the liberty of a fiscal
incentive provided to him by the legislation.
For example setting up a plant in the SEZ
zone which itself comes with an incentive
and actually doing the production
elsewhere and claiming the tax benefit out
of the plant from SEZ. This is tax mitigation.
To summarize there is actually a very thin
line of difference between tax evasion, tax
mitigation, tax avoidance and tax planning.
If the tax authorities are not competent in
drawing these lines than its definitely going
to hurt the sentiments of the tax payers. To
keep up the confidence of the tax payers
and to provide clear indicators as to what
sort of action will come under which
category GAAR needs to be articulated
diligently.
Tax collection is a vital mode of revenue
collection which helps in achieving the
objective for greater good to the economy
of any nation. Hence it needs to be efficient
and effective to meet the needs of public
welfare and economic development.
Avoiding of tax through treaty shopping is
an offence. GAAR can be applicable on any
misuse of the provisions of a tax treaty. It
becomes the onus of the taxpayers to make
arrangements that can serve the mass.
Its been over a long period ever since the
debate on the essentiality and necessity of
introducing GAAR is on the table of
stakeholders. Such discussion are mostly
clustered with weak objectives like building
the Chinese wall of integrity of tax system
which can become a justifiable means to
taxpayers to address their concerns
smoothly ensuring the economic growth of
the community from the business. To add
flesh to the discussion it is vital to focus on
the precise form of GAAR provisions so that
loyal taxpayers are not harassed and
exploited by the tax authorities. Provisions
needs to be precise enough to identify
effectively and efficiently unlawful
arrangements. This precise provisions and
well defined integration of the tax system
will certainly infuse confidence in the
stakeholders.
The conundrum to the discussion is that
there is a very thin line of difference
between avoidance and evasion. Over a
period of time, liberalized Indian economy
6

has witnessed many sophisticated form of
tax avoidance arrangements which
certainly has eroded the tax base and
making the economy even more sluggish.
With such complexities Government has
made sincere efforts to gather ample of
information from nations with which India
does not have any tax treaty in place and
has entered into Tax Information Exchange
Agreements (TIEAs) with several countries.
These TIEAs help in procuring information
the Government of various nations and has
also helped in widening its scope in cases
like Tax treaty with Australia.
3.2.1Tax evasion vs. Tax avoidance
Thus it is essential to understand the
difference between Tax Evasion and Tax
Avoidance. The Organization for Economic
Co-operation 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
tax payer pays less tax than he is legally
obligated to pay by hiding income or
information from tax authorities. The
above definition hardwires the fact that tax
evasion is a serious offence as it is done
with the sole intention to pay less by illegal
means. Tax avoidance, on the other hand
is defined by the OECD
.
as term used to
describe an arrangement of a tax payers
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. The above definitions helps in
distinguishes the two. Tax avoidance
details or key facts can always be found as
it is on records and cannot be hidden
whereas tax evasion has no records in
place. To add another piece to the puzzle it
is the term tax planning which is sometimes
used in place tax evasion and tax
avoidance. The OECD defines tax planning,
as arrangement of a persons business
and /or private affairs in order to minimize
tax liability. Therefore with this we are still
left to ponder over some cases where the
dividing line between tax planning and tax
avoidance, or between permissible tax
avoidance and impermissible tax
avoidance, may not be clear.
Hence it is important to acknowledge the
fact that GAAR is not a remedy for tax
evasion, but for tax avoidance as it cannot
deal with something which has got no
records reported. Therefore Government
has identified GAAR as a mean to tackle
Tax avoidance.
4. Difference between SAAR & GAAR
India had provisions on similar lines of
GAAR known as Specific Anti-Avoidance
Rule (SAAR), which was made by judges to
deal with such issues and eventually got
7

incorporated in the Income- tax Act, 1961.
SAAR is a set of rules specifically designed
to target to arrangements of tax avoidance.
The features where SAAR and GAAR can
be distinguished are discussed below:
SAAR by its form are more precise and
specific and therefore it helps in minimizing
time as well as cost judicial proceedings.
Since SAAR is more precise in form it
definitely provides assurance to the
taxpayer while arranging or formalizing the
agreement. Therefore not involving in any
kind of litigations.
SAAR does not provide any discretionary
powers to the tax authorities. GAAR on the
other hand involves discretionary
authorities at the hands of taxman.
The limitations of SAAR is being specific in
nature and is unable to cover the entire
gambit of tax avoidance. Thus it leaves the
taxpayer with an edge to capitalize on
loopholes of the provisions. GAAR has
provisions which are wider thereby
reducing the options of the taxpayer to
make any arrangement which would fructify
the intentions of avoiding tax.
5. Recommendations
India is a developing economy and Indian
markets over a period have become the
most attractive markets for investors from
all across the world. World is showing their
confidence in Indian economy and way
forward we can expect to see growth
happening at a greater pace than what we
have today. All these opportunities needs
to be kept in mind before we build the fence.
The purpose of the fence is to protect
ourselves from the intruders and not build a
wall for our guests. Keeping this in mind
GAAR provisions are like a double-edged
sword and it needs to be dealt judiciously.
The introduction of GAAR in its current form
is likely to create uncertainty about tax
implications of various business/non-
business transactions or arrangements.
Many number of times stakeholders have
debated on the form of GAAR and when
should it be introduced. The critics of GAAR
argues that matter could have been left to
the court to be decided according to the
well-known judge made doctrines and rules.
The GAAR is inefficient and contrary to rule
of law. The legal act is disregarded and
avoidance is presumed. The application of
GAAR involves, first discovery of the
legislative intent and then its application to
the facts and circumstances of a given case.
This would only make life tough of the
taxpayers and in current scenarios such
provisions would only create negative
environment against the efforts of
increasing domestic as well as foreign
1

inward investments. The Supreme Court
has in Vodafones case also witnessed that
Foreign Direct Investment (FDI) flows
towards location with a strong governance
infrastructure which includes
representation of laws and how well the
legal system works. Certainty is
fundamental to rule of law. Certainty and
stability forms the basic substance of any
fiscal system. Tax policy certainty is
essential for taxpayers (including foreign
investors) to make sensible economic
choices in the most proficient manner.
Investors should know where they stand. It
also helps the tax administration in
imposing the provisions of the taxing laws.
6. Conclusion
Therefore the proposal of GAAR provisions
needs more attention and it can definitely
impact a lot of macro as well as micro
factors. Will it be a blessing or a burden to
our next generations is what we need to
keep in mind and have a holistic view
towards drafting of the same. The vital
question which arises to all of us is that:
How wise would it be to introduce the
GAAR with its present form in the Indian
Tax Law in current economic scenarios?
At this stage of introducing any Anti-
avoidance Rule, it would be better to
introduce Specific Anti-Avoidance Rules
with reference to certain specific
arrangements which the Government may
have professed to be tax avoidance
arrangements and confine the application
of Anti-avoidance Rule to such cases. As
against a GAAR, Specific Anti-Avoidance
Rules give confidence to the taxpayers and
also help in reducing litigation.
Another important point that cannot be
overlooked is that GAAR is being perceived
as a revenue generating method of the
government to match their checks and
balances and hence it defeats the purpose.
The better way to look at things would be
involve all the stakeholders and ask for their
contribution in formulating and
implementations of the same. This will
further smoothen the process and infuse
confidence in the stakeholders in the
governance of the land. In many developed
economies such practice has been adapted
and that has yielded a response which have
far-reaching implications.
Therefore, in Indian context it is
recommended to adapt Specific Anti-
Avoidance Rules which is already exists
and only needs to be expanded rather than
introducing broad based General Anti-
Avoidance Rules.
References
Krishnamurthy, V., 2012, General Anti
Avoidance Rules introduced in the Finance
2

Bill 2012, International Taxation, 6, 623-
635
Mittal, D. P., 2012, Law and practice
relating to General Anti Avoidance Rules
(GAAR), Taxman Publications, New Delhi.
Major recommendations of expert
committee on GAAR accepted, 2013,
Public Information Bureau, Government of
India.
URL:http://finmin.nic.in/press_room/2013/
MajorRecomGAAR14012013.pdf
Goyal, R., 2012, GAAR What is GAAR,
Allbankingsoluitons.com
URL:http://www.allbankingsolutions.com/B
anking-Tutor/GAAR-What-is.htm
Jain, T., 2012, GAAR and Corporate
Governance: Will the Stick do the Trick?,
Journal on Governance, 1, 629-674
Garg, R., and Mukharjee, K., 2012,
Removing the fences looking through
GAAR, PWC White Paper, 1-60.
Michael, W., 2002, The impact of outcome
orientation and justice concerns on tax
compliance: The Role of Taxpayers
Identity, Journal of Applied Psychology, 87,
629-645
OECDs project on Harmful Tax Practices:
Update on Progress In Member Countries,
2006,URL:
http://www.oecd.org/dataoecd/1/17/37446
434.pdf
Singhania, A., 2012, Impermissible for FII
to invest, International Taxation, 6, 658-661
Krishnamurthy, V., 2012, General Anti
Avoidance Rules introduced in the Finance
Bill 2012, International Taxation, 6, 623-
635
Goradia, S., & Chaudhari, G., and Bhutani,
M., 2012, Draft GAAR Guidelines (India),
BMR Advisors White Paper, 1-15
Alaire, Ben., 2012, Retroactivity and the
General anti avoidance rule, University of
Torrento White Paper, 1-24
Prebble, Z. M., and Prebble, J., 2012, The
Morality of Tax Avoidance, Victoria
University of Legal Research Papers, 2,1-
54
Xavier, S., 2009, Mauritius : A Preferred
Jurisdiction for Cross Border Investments,
Conyers Dill & Pearman,
URL:http://www.conyersdill.com/publicationf
iles/Article_179_Mauritius_XBorder_Investm
ents.pdf
Ordower, H., 2010, The culture of Tax
Avoidance, Saint Louis University Law
Journal, 55, 1-68
Prebble, R., and Prebble, John., 2010,
Does the use of General Anti-Avoidance
Rules to combat Tax Avoidance breach
Principles of the Rules of Law?, Saint Louis
University Law Journal, 55, 1-26
3

Prebble, Z. M., and Prebble, J., 2009,
Approached to Tax Avoidance Prevention
in Seven Asian Jurisdictions: A comparison,
Asia Pacific tax bulletin, 15, 22-39
Elliffe, C., and Prebble, J., 2009, General
Anti-avoidance Rules and Double Tax
Agreements: A New Zealand Perspective,
Revenue Law Journal, 19, Article 4
Prebble, J., 1989, Anti-Avoidance and Tax
Treaty Policies in the Asian Pacific Region,
Institute of Policy Studies Newsletter, 19,
11-13
PM constitutes Expert Committee on
GAAR, URL: http://pmindia.nic.in/press-
details.php?nodeid=1462
Mehta, V., 2012, Understanding the GAAR
Effect, Dalal Street Investment Journal,
URL: http://www.dsij.in/article-
details/articleid/4284/understanding-the-
gaar-effect.aspx
Deolitte White Paper, 2012, General Anti-
Avoidance Rules India and International
Perspective, URL:
http://www.deloitte.com/assets/DcomIndia/
Local%20Assets/Documents/Tax%20docu
ments/GAAR%20-%20India%20and%20In
ternational%20Perspective.pdf
Draft Guidelines regarding implantation of
General Anti Avoidance Rules (GAAR) in
terms of section 101 of the Income Tax Act,
1961, URL:
http://www.incometaxindia.gov.in/archive/
BreakingNews_GAARRules_28062012.pdf