General Anti Avoidance Rules GAAR India and

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General Anti Avoidance Rules GAAR India and International Experience. Introduction,Executive Summary 4,Pre GAAR concept 6. Pre GAAR concept India experience 10,BEPS and GAAR 14. International experience 16,India regime 30,Way forward 38. General Anti Avoidance Rules GAAR India and International Experience. Executive Summary, Internationally tax avoidance has been transactions carried out for tax purposes. recognized as an area of concern and and also the need to provide some. several countries have expressed semblance on the matter of tax avoidance. apprehension over tax evasion and, avoidance This is also evident from the However given the inherent challenge and.
fact that nations are either legislating the subjective nature of the GAAR if not. the doctrine of General Anti Avoidance appropriately implemented it may affect. Regulations in their tax code or business sentiment and deter foreign. strengthening their existing code India has investors Considering the goal of any. also sought to address the issues relating anti avoidance legislation viz targetted. to tax avoidance and evasion by bringing attack on tax avoidance arrangements. in General Anti Avoidance Rule GAAR in without creating undue hardship for. addition to various transaction specific genuine and honest taxpayers India would. Special Anti Avoidance provisions need to address the issue in the proper. perspective so that the provisions and their, The introduction of GAAR recognizes that it implementation do not become a law onto. may not always be feasible for the judiciary themselves. to address the unforeseen implications of, General Anti Avoidance Rules GAAR India and International Experience. In formulating the GAAR Indian tax This publication is an update to the earlier. authorities have followed an elaborate paper on the subject It outlines some of. consultative process and have the nuances relating to GAAR by examining. considered various concerns raised by the historical perspective for tax avoidance. the stakeholders in legislating the final generally and in India The concept of. regulations This is a laudable effort GAAR international experience on GAAR. Although the CBDT has issued clarifications legislation in some jurisdictions and. on certain issues raised by stakeholders GAAR provisions as incorporated under. it would be helpful for taxpayers if the the Income tax Act 1961 followed by a. following are also considered comparison with other countries have been. covered in the paper The earlier paper,application of GAAR being explained by. covered an overview of GAAR legislation in,way of examples illustrations. China South Africa Australia and Canada, use of business purpose test with The same has been updated in this paper.
emphasis on the different concepts of to incorporate major developments in. the economic substance associated with these jurisdictions since the last paper. the categories of tax avoidance behavior This paper also gives an overview of GAAR. such as tax evasion acceptable tax legislation in UK Germany Singapore and. avoidance and abusive tax avoidance Brazil and briefly discusses the ongoing. and BEPS action plan of the OECD to prevent,treaty abuse and the steps taken by India. balancing India s adoption of Base,to align the Indian tax law and treaties with. Erosion Profit Shifting BEPS Action,the same The way forward for authorities. Plans of the Organisation for Economic,and the taxpayers has also been discussed. Co operation and Development OECD,and application of GAAR.
General Anti Avoidance Rules GAAR India and International Experience. Pre GAAR Concept, Internationally and in India a constant the existence of alternatives one of Tax planning may be legitimate provided. debate has been raging over the issue of which would result in less tax than the it is within the framework of law. tax avoidance Over the years the term other Moreover motive would be an Colourable devices cannot be part of tax. tax avoidance is understood as arranging essential element of tax avoidance A planning and it is wrong to encourage or. business affairs with the object of obtaining person who adopts one of the several entertain the belief that it is honorable to. tax advantage while prima facie fully possible courses to save tax must be avoid the payment of tax by resorting to. intending to comply with the law in such distinguished from a taxpayer who dubious methods It is the obligation of. respect Some principles underlying the adopts the same course for business or every citizen to pay their taxes honestly. meaning of tax avoidance are personal reasons1 without resorting to subterfuges4. The expression is used to describe A course of action designed to conflict Further courts in India have broadly. every attempt by legal means to with or defeat the evident intention of indicated that if some device has been. prevent or reduce tax liability which Parliament2 used by a taxpayer to conceal the. would otherwise be incurred by taking true nature of the transaction it is the. Where it reduces the incidence of tax, advantage of some provision or lack of duty of the taxing authority to unravel. borne by an individual taxpayer contrary, provision in the law It pre supposes the device and determine its true. to the intentions of Parliament3,Carter Commission in Canada. Lord Nolan in IRC v Willoughby,Lord Templeman,Simon in Latilla v I R C 11 ITR Suppl 78 79 HL.
General Anti Avoidance Rules GAAR India and International Experience. character However the legal effect of Real economic substance This is. the transaction cannot be displaced the American notion under which the. by probing into the substance of the economic substance is determined by. transaction looking at both objective and subjective. factors to see if there is any potential for, Considering these continuing difficulties profit other than tax savings or if there is. of classifying transactions as being any meaningful change in the economic. acceptable within the framework of law or position of the taxpayer Under this. not a need is being felt to move towards doctrine a transaction lacking economic. a structured approach to address the,issue of avoidance both from a legal and. economic point,In analysing the substance vs form of a. transaction the question arises whether,one needs to look at the legal or the. economic substance,Legal substance would refer to,characterization which emerges from a.
close study of the rights and obligations,in a legal relation whereas economic. substance has different interpretations as,propounded by various jurisdictions. General Anti Avoidance Rules GAAR India and International Experience. General Anti Avoidance Rules GAAR India and International Experience. substance will be ignored In Gregory vs it could be invoked only when the Further the OECD leaves it to the individual. Helverig 1934 US the Court outlined purposive interpretation approach is countries to introduce anti abuse. that adopted The principle outlined herein legislation which they consider could be. came to be considered as a general rule applied without interference by the Model. It does not follow that Congress meant to of statutory construction not a separate Convention or the bi lateral tax treaty. cover such a transaction The meaning of judicial doctrine between the countries inter se However. a sentence may be more than that of the the OECD Commentary on Article 1 of. separate words as a melody is more than The common denominator which can be the Model Tax Convention also clarifies. the notes and no degree of particularity can found in most countries is that if a taxpayer that a general anti abuse provision in the. ever obviate recourse to the setting in which has multiple avenues available to structure domestic law in the nature of substance. all appear and which all collectively create If his transaction he is free to choose the over form rule or economic substance. what was done here was what was intended most tax efficient avenue provided a level rule would not be in conflict with the. by the statute it is of no consequence that of commercial justification for the same treaty. it was all an elaborate scheme to get rid exists and tax is not the only reason. of income tax as it certainly was But In other words the general anti abuse. the purpose of the section is plain enough In respect of international recognition rule would override the provisions of the. men engaged in enterprises might wish to to the concept the Vienna Convention tax treaty Hence the underlying principle. consolidate or divide to add to or subtract provides that international agreements are emanating from international experience. from their holdings Such transactions were to be interpreted in good faith In case any in respect of tax avoidance and where. not to be considered as realizing any profit international agreement treaty leads to GAAR legislation has not been enacted is. because the collective interests still remained unintended consequences like tax evasion the recognition that the contentious issue. in solution or flow of benefits to unintended person it of determining establishing the doctrine. is open to the signatory to take corrective of substance over form would have to be. In other words the benefit of the objective steps to prevent abuse established through an examination of the. tax result would be denied where the legal substance the legal form or the real. transaction did not change the economic economic substance of the transaction. position apart from the tax benefit nor did This has also been duly adapted under. it reflect any facet of the business which Indian jurisprudence as outlined in the. could be considered as lacking economic section below. substance and was not the thing which the,statute intended. Step Transaction plus business,purpose This UK version combines. step transactions doctrine and business,purpose doctrine and enables the courts.
to overlook the step transactions that,serve no business purpose This could. be evolved from the various juridical,pronouncements made by the. UK courts with regard to transaction,considered as entered into with the. objective of tax avoidance,In Duke of Westminster vs IRC their. Lordships held that the Act is to receive,a strict or literal interpretation and that.
a transaction is to be judged not by its,economic or commercial substance but. by its legal form In Ramsay vs IRC their,Lordships watered down the economic. substance theory on the ground that, General Anti Avoidance Rules GAAR India and International Experience. Pre GAAR Concept,India Experience, Indian tax laws though providing for of his trading transactions Income which. specific anti avoidance measures did accrues to a trader is taxable in his hands. not have any general anti avoidance Income which he could have but has not. rules or regulations Courts in India have earned is not made taxable as income. over the years drawn out the general accrued to him Avoidance of tax liability. parameters and principles in outlining by so arranging commercial affairs that. whether a transaction or scheme would be charge of tax is distributed is not prohibited. considered as tax avoidance tax evasion or A taxpayer may resort to a device to divert. tax planning under the tax laws the income before it accrues or arises to. him Effectiveness of the device depends not, The Hon ble Supreme Court SC 5 observed upon considerations of morality but on the.
that operation of the Income tax Act Legislative,injunction in tax statutes may not except on. the law does not oblige a trader to make peril of penalty be violated but may lawfully. the maximum profit that he can get out be circumvented. CIT v A Raman and Co 1968 67 ITR 11 SC, General Anti Avoidance Rules GAAR India and International Experience. Further in Bank of Chettinad s case6 the was strictly within the four corners of the. Hon ble Privy Council PC stated that law and any colorable device or dubious. methods to minimize tax incidence were, the tax authority is entitled and is indeed not legally permissible. bound to determine the true legal relation, resulting from a transaction If the parties It appears that there is no single approach. have chosen to conceal by a device the legal towards the issue of substance over. relation it is open to the tax authorities to form A clear tendency exists for Revenue. unravel the device and to determine the true authorities to try and counter any kind. character of the relationship But the legal of undesired outcome in their eyes of a. effect of a transaction cannot be displaced certain piece of legislation by applying the. by probing into the substance of the substance over form doctrine However. transaction while examining a legally valid transaction. the Revenue authorities should proceed, Another important Indian case7 addressing objectively and not hypothetically attribute.
the substance over form question motives behind the taxpayer s action. reiterated the principles laid down by the, House of Lords in the decision of Duke We have witnessed a contentious journey. of Westminster and took the view that for determining whether the affairs. tax planning was legitimate so long as it planned by the taxpayer were legitimate. Bank of Chettinad Ltd v CIT 1940 8 ITR 522 PC, McDowell and Co Ltd v Commercial Tax Officer 1985 154 ITR 148 SC. apprehension over tax evasion and avoidance This is also evident from the fact that nations are either legislating the doctrine of General Anti Avoidance Regulations in their tax code or strengthening their existing code India has also sought to address the issues relating to tax avoidance and evasion by bringing in General Anti Avoidance Rule GAAR in addition to various transaction

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