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

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

Location: Ministry of Finance, Delhi (2008)

Why government wants to extract maximum revenue?

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

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

Drafting of the DTC Bill

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

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

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

Rules of GAAR

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

Burden of Proof

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

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

Parliament of India (August 2009)

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

Lok Sabha TV-viewer: Yaar, ek toh Pranab’s Bengali English accent is so hard to decipher in the first place and all this shouting is making it impossible to understand what he is saying!

Review by Standing Committee

The bill is sent to the Standing Committee on Finance, headed by BJP Leader Yashwant Sinha, for review. The Committee issues an advertisement in the major newspapers :
“We’ve uploaded the draft DTC code on our website so if anyone got problem or suggestion, send it by ordinary post or meet us in person because our fax machine is not working and our Secretary forgot the Gmail password.
One such stakeholder is our good old Mr.Vodafone, he appears before the standing Committee to present his case.

Pro and Anti GAAR viewpoints

Mr.Vodafone: This GAAR is totally rubbish. I strongly oppose it because

Should be a separate Act

  • Government should have introduced GAAR as a separate act. But Pranab has mischievously packed this GAAR with Direct Tax code (DTC).
  • Target audience of DTC = corporates+ middle-class tax payers but target audience of GAAR is mostly big corporates such as myself.
  • And the dimwit media of India doesn’t really understand what is the issue and confuses the junta as if we the corporates are against the entire DTC.
  • No, we are not against DTC; we are concerned about GAAR. But yet we are unnecessarily getting vilified just like anyone who dares to speak against Team-Anna is automatically labelled as Congi-agent.

Assumption of Guilt

Mr.Vodafone: Adding insult to the injury, the GAAR rule says, “It shall be presumed that tax-avoidance is the main purpose of a business deal, unless otherwise proved by the taxpayer.” What the hell man?? This is same like POTA and TADA were it was presumed that a person is guilty, and the burden of proof rested on the suspect.

Why treating us as terrorists, especially when you don’t have the guts to say, “Maoists=terrorists” in UN assembly?

Kalmadi can walk out on bail despite stealing crores from Indian-taxpayers and we are not even allowed to do proper tax planning.

Even Supreme Court said in the Vodafone case that.
All tax plannings cannot be said to be illegal / illegitimate or impermissible. Genuine strategic tax planning is permissible.

Conflict of Interest

Mr.Vodafone: In the GAAR, IT Commissioner alone will decide whether a business deal is genuine or a tax avoidance sham? But Why give him this discriminatory power?

  • We all know that IT Commissioners are given revenue collection targets from ‘above’.
  • So when an IT Commissioner is under pressure to meet the target, he may issue a notice to us even where there is no case of tax avoidance, and the deal is totally legit.
  • Ultimately we’ll have to treat him as ‘maai-baap’, give him gifts and bribes every Holi-Diwali, thus GAAR will bring back the Inspector Raj.
  • And IT Commissioner is given so much power. He’ll be Police, Judge, Jury and the Executioner. On one hand, you are against the Jan-Lokpal giving same argument and yet allow it in GAAR.
  • In most of the countries, IT Commissioners don’t have so much discretionary powers, the GAAR matter is generally handled by a panel/Committee system and not by individual Commissioners.

Pranab: but there are safeguards. You can appeal to the DRT, ITAT, High court and Supreme court, if you’re not happy with IT Commissioner’s order!

Mr.Vodafone: But we’ll have to waste so much of our money in hiring tax-lawyers! Do you have any idea how much time and money did it cost me to prove my innocence in Vodafone-Hutch deal? This GAAR will only generate more income for the top 10-12 tax lawyers of India.

Misplaced priorities: Tax Evasion vs Tax Avoidance
Tax EvasionMeans 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.Black money falls here.
Tax AvoidanceAn arrangement of a tax payer’s affairs that is intended to reduce his liability and that although the arrangement could be strictly legal.The key distinction being that in tax avoidance the key facts and financial details are not hidden by the tax payer but are on audit-record.So there is no ‘black-money’ because all the money is reported to the tax-authorities.
Tax PlanningArrangement of a person’s business and /or private affairs in order to minimize tax liability.
  • GAAR is not an antidote for ‘tax evasion’; it can only solve ‘tax avoidance’.
  • The GAAR cannot deal with tax evasion since it cannot deal with what is not reported.
  • You’ve shown enthusiasm against Tax evasion but you don’t flex your muscles in same manner when it comes to Hasan Ali and other tax evaders!
  • So instead of clubbing GAAR with DTC, make a separate law for that incorporates not only GAAR (tax evasion) but also provisions for black money.
  • GAAR is only a piecemeal approach. The situation requires a holistic approach to handle both Tax Avoidance + Tax evasion.

Piecemeal vs Holistic Approach

Pranab: But my friend, something is better than nothing. As you’re well aware, I don’t enjoy majority in Rajya-Sabha. It is very tough for me to pass any bill be it women’s’ reservation bill or pension and insurance reforms.

  • According to the Constitution, Income tax legislation falls under the domain of Union Government. Therefore I can proceed easily with DTC without consulting State Governments. Besides DTC target audience=middle class+corporates= The ‘vote-bank’ is large enough so no party dares to oppose DTC beyond a level. I can easily pass DTC (+ GAAR) in Rajya Sabha too.
  • But when we talk about “Holistic” approach of dealing with “Black Money”, that involves both direct and indirect taxes. So, I’ve to take state governments in confidence before passing any legislation or framework, just like the FDI in retail or GST (Goods and services tax.)
  • You’ve already seen► all Non-Congressi chief ministers opposing NCTC. Even if I want to do something good, How am I supposed to proceed with a “holistic” approach / legislation to deal with both Tax Avoidance + Tax evasion?

No respect for bilateral Tax treaties=Uncertainty

Mr.Vodafone: The GAAR even says that its provisions shall override the provisions of any Double Taxation Avoidance Agreement (Tax Treaty) that India may have entered into with other nations. This means total disrespect for bilateral tax treaties!
Vienna Convention on the Law of Treaties that that a treaty should be interpreted and must be performed by parties to it in “good faith”.

Pranab (intervenes): haha dude we have neither signed nor ratified that Vienna Convention!

Mr.Vodafone: But then how am I supposed to do business? There is no certainty whether you’re going to respect the International tax treaties or not. It will all depend on the whims and fancies of your IT Commissioner.

How am I going to make business deals with other companies abroad? Economy cannot prosper in places having any type of uncertainty. Take the case of Naxal affected regions.

Besides Supreme Court has said in my case
Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner.
Pranab: ya ya I know it very well what Supreme Court said in your case. And the main reason for doing GAAR is to make sure that you can’t win in Supreme court next time.

Mr.Vodafone: Then I’ll make sure you that get a downgrade in Standard and Poor (S&P)’s rating. Just one stroke and the FIIs will pull out crores from your market in a week=Rupee weakens =crude oil becomes expensive= inflation. Fir GAAR ki poongi bajaate rahenaa.

Summery

  • GAAR is a set of rules to check on tax-avoidance.

Pro GAAR-Lobby
Pranab, His party, Jholaachhap NGOs and Leftwing columnists of The Hindu et al

  • Big companies sell their products in Indian and make huge cash. Yet they do business deals in Mauratius, Caymen’s island etc to avoid paying taxes to Indian Government.
  • With GAAR, we can recover taxes from them and use it for poverty-removal (!)

Anti GAAR-lobby
Big Corporates, Sharebrokers, Rightwing Columnists of Indian Express, Times of India et al

  • GAAR is a draconian Act, in its present form.
  • IT Commissioners are vested with so much discretionary powers, and they’ll abuse it to meet the Revenue collection targets.
  • Burden of proof rests with suspect and not with the prosecution. GAAR puts the onus on the taxpayer to prove that his business-deal is not for tax-avoidance. This will create a lot of uncertainty and could potentially lead to a dangerous trend of the IT Commissioner questioning almost every transaction that results in tax saving.
  • GAAR doesn’t respect bilateral tax-treaties= uncertainty=not good for making business decisions.

End of article. Die hard fans of Sachin, Nupur Talwaar and anyone else not as bored and fed up as I’m, can leave now. No need to read further.

Epilogue #1: Mr.Vodafone

Some newspaper columnist: GAAR is blah blah blah blah GAAR is blah blah blah..

Mr.Vodafone: what is this yaar? GAAR should have been a news issue since August 2009 when Pranab introduced the DTC bill in parliament.

But Only in 2012, after Vodafone judgment and Budget 2012, you fellas start writing about GAAR and that too only for namesake. And nobody is gonna read your newspaper columns except those UPSC and MBA aspirants. This GAAR issue requires proper public-debate because it has direct implications on Foreign investment, IIP, GDP, employment, inflation everything. Why no news channel is taking up this GAAR-matter?

Newchannel Anchor: sorry man but my news schedule is totally jampacked with Sachin’s Rajya-sabha nomination and Nupur Talwar’s bail case. I’ve to cover these two breaking news tirelessly for next 15 days 24/7.

Mr.Vodafone: Thousands of girls get raped and killed across India on daily basis. What about them? They’re not important? Don’t they too deserve to get justice and media activism? Posh victims of Delhi-Noida region deserve quicker justice than some poor victims in Chhattisgarh or Rajasthan?
Zee News, Aaj Tak, NDTV, Star News, TimesNow and CNN_IBN, no matter which channel I switch to, there is only Nupur Talwaar, Nupur Talwaar and Nupur Talwaar. You’re giving minute by minute live coverage of her: Nupur wore her own clothes to jail, she borrowed a jail library book, she was given a blanket, a mug, and she dined on brinjal-potatoes, dal and rotis. Hell, even Nathuram Godse, Lee Harvey Oswald and Nalini Sriharan didnot get this much attention!

Newchannel Anchor: How can you be so cruel and insensitive about the Arushi murder case? If she wasn’t murdered she could have become the next female President, Speaker or Prime Minister of India.

Mr.Vodafone: oh yes…right ….now I get it. And since Sachin is becoming a Rajya Sabha MP…. Rivers of milk and honey will flow, Naxalites will stop kidnapping good Collectors, Drunkards will stop beating their wives, Lokpaal bill will be passed…., Black money will be brought from Switzerland, Kashmir issue will be solved, Bhopal Gas victims will get proper compensation and all the MBA colleges of India will stop looting aspirants in fee refunds, by declaring their results simultaneously on same date, right?

Newchannel Anchor: Haahaahaa really man, please stop talking like Justice Katju!

Mr.Vodafone: But I didn’t mention Farmer suicides or Sunny Leone.

Epilogue #2: Pranab

PranabDamn it!! This GAAR thing is still stuck in the parliamentary Committee. How am I supposed to get more Revenue in the mean time? How will Rahulbaba say in Gujarat assembly election rallies ki “hum Delhi se paisa bhejte hai lekin Haathi Modi paisa khaa jaataa hai!”
हम दिल्ली से पैसा भेजते है लेकिन हाथी मोदी पैसा खा जाता है.
IT CommissionerBoss, Tell him not to repeat the speeches of UP rallies in Gujarat, else UP result fiasco will also get repeated in Gujarat. Anyways, I’ve got an idea about increasing Revenue collection.
PranabThen by all means share it with me.
IT CommissionerHow about 80% tax on skin-whitening creams and also on the brand-ambassadors of those skin-whitening creams: SRK, John Abraham et al.
PranabBut heavy direct-taxation leads to more tax evasion and heavy indirect-taxation leads to smuggling as it happened in Once Upon A Time In Mumbaai because India Junta has obsessed with white skin.
IT CommissionerOk another idea Sir-ji.You become brand ambassador of Sandhi Sudha Tel (oil).In front of camera, you just have to say :
“I did not need a knee replacement surgery thanks to Sandhi Sudha Tel. (one type of snake oil!)

Mrunal recommends

  1. (free) NCERT, NIOS, TN-Books 4 History,Geo,Sci
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  5. Objective General English SP Bakshi
  6. Word Power made Easy -Norman Lowe
  7. Topic wise Solved Paperset by Disha

52 Comments on “[Economy] General Anti-Avodiance Rules (GAAR): Meaning, Pros, Cons, Implications, Explained”

  1. Great article and Good Satire. Keep it up:)

  2. great work…

  3. why do not tv news channels show all this stuff?

    1. Who will be the viewer then only the civil service aspirants ….LOW TRPs=>LOSS=>Channel have to shut down

      1. real mrunalite . showing relation by arrows ==> :-)

  4. Gr8 article sir, keep posting such ones.

  5. Fantastic… Best of all ur articles…

  6. Sir , You Are Absolutely Outstanding …… !!!!!!!!!!!

  7. Sir , You Are Absolutely Outstanding. You made it as simple as learning A B C D……..Z.

  8. Awesome artile..gr8 satire…

  9. Pingback: [Economy] LIST of All Articles published by me to clear the basic concepts of Economy for any recruitment exam or interview « Mrunal

  10. Hi Sir,

    As I came to this article, I found a “Vodafone-Hutch Capital Gains tax case” link which did not redirect me to the article I expected. As in the “retrospective” scenario, this is an important article, please restore the article.

  11. Please ellaborate the following:
    1. Advance Pricing Agreement
    2. Difference between QFIs and FIIs
    3. What are OFS(Offer for Sale) and IPP (Institutional Placement Programme)? What has SEBI done regarding OFS and IPP recently?

    Thanks

  12. Kindly Update this article about GAAR, as few changes have been made, like, for example: onus of proof has been shifted to tax authorities and not tax payers. Will highly appreciate it.
    Thanks Mrunal.Keep up tha good work.

  13. sir i become the fan of you…………..excellent work with comedy………..like nani ji story………….tons of salute to u..

  14. excellent article by u sir, nice comment by you “Fir GAAR ki poongi bajaate rahenaa” :)

  15. I laughed so hard! I am hooked to this blog. Will surely recommend with when you interview me after I top the exam!

  16. This piece of writing will assist the internet people for setting up new weblog or even
    a weblog from start to end.

  17. Sir please give a light on Mali crisis

  18. Sir please can u give a light on Mali crisis

  19. Mrunal sir plz give information on mali happenings

  20. your article of DTC is unreachable,the page isn’t working,please look into the problem

  21. Your Epilogue-1 is simply great. You have shown the real India in those few lines……those are solely the reasons why India is still backward…..Very impressive

  22. love you and your work plz add one FACEBOOK LIKE BUTTON on your posts..

  23. Any person who do not have any knowledge about economics can understand your articles…i have never seen anybody teaching in a simple/lucid manner….congrats dudo..

  24. Applause..keep it up..

  25. remarkable style, excellent description of GAAR:)

  26. GAAR has been defered by 2 yrs not 3 yrs as many sites are mentioning it. It was to come in force in 2014 now it will from 2016, shome panel said it should be announced in ’16 and implement from ’17

  27. mind blowing sir,better to enjoy here instead of chatting fb

  28. oh god!!!!!!!!!! i really couldn control laughing… great article mrunal

  29. sir u r mindblowing….am d 1 who hate economix much more than a lizard…….chipkali…..ur humorous talks make it interesting n easy to understand.thanx a lot…..
    i want to know abot COP MEETING HELD IN HYDERABAD….but i could not find it..Pls help…

  30. Mrunal bhai pls make it clear that it is Vienna convention on the law of treaties 1969 which is not signed/ratified by India and NOT Vienna convention on diplomatic immunity 1961 !

  31. इस तेल के इस्तेमाल से मुझे जोड़ो के दर्द मे बहोत राहत मिली है. ha ha ha ha ha

  32. Hahahahaaaaa !!!!! so much information explained , so lucidly. I have thoroughly enjoyed reading the article. Hats off to you.

  33. awesommmmmmmeeeeeee………………. Hats off to you MR MRUNAL….. U r a brilliant man………U made a complex topic so simple…. I am from science background and u make economics concepts so easy for me. Thank you so much Mr Mrunal…. God Bless You….

  34. what a terrific article… really cant get such an explanation anywhere else…!! thanks

  35. PRAISE WORTHY JOB.
    A TOUGH ARTICLE BUT WITH SIMPLE APPROACH..
    THANK U SO MUCH….

  36. Very nice article sir..!! Only one word to say….Awesome..!! I understood what is GAAR, just by reading this article once.

  37. When are ur article coming sir?
    eagerly waiting for it

  38. GAAR

    informative as well as a nice refreshing one .

  39. Sir the link s provided above are not working error 404….i want to get articles regd dtc etc…ur prevs articles….can I know if I get them accessed..thanks

  40. Great job.. hats off..

  41. from where can i get articles dating back to 2011

  42. As I came to this article, I found a “Vodafone-Hutch Capital Gains tax case” link which did not redirect me to the article I expected. As in the “retrospective” scenario, this is an important article, how should i get it?

  43. Nice article.. really appreciate..

    After reading the pranab and Sandhi Sudha Tel, I was laughing so much.. man my stomach is aching..

    Got Information and laughter too.. :) Damn

  44. I have been following your site for the past 3 months and there’s a jovial tone to the article, but this one was a ripper.
    Sachin Rajya Sabha example made me RoFL

    1. Typos corrected:
      I have been following your site for the past 3 months and there’s generally a jovial tone to the articles; but this one was a ripper!
      Sachin Rajya Sabha example made me RoFL

  45. hello sir, your notes and way of explanation is very good . I am preparing for my PSU interviews and it is very helpful.
    Thankyou sir

  46. Please explain DTAA from the perspective of different countries!

  47. maza agaya sir. agar Raju hirani ko mila to “3 Idiots part2” pakka 😊 I recommended it to my friend too

  48. Great work sir .i became the fan of u sir.i hope u providing all updates like this.

    Thank you sir

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