GAAR - General anti-avoidance rule (India)


General anti-avoidance rule (GAAR) is an anti-tax avoidance regulation of India. Originally proposed in the Direct taxes code 2010,are targeted at arrangement or transactions made specifically to avoid taxes. It was introduced by then Finance Minister, Pranab Mukherjee, on 16 March 2012 during the Budget session. It was considered controversial because it had provisions to seek taxes from past overseas deals involving local assets retrospectively.

During the 2015 Budget presentation, Finance Minister Arun Jaitley announced that its implementation will be delayed by 2 years.

In 2007, Vodafone entered the Indian market by buying Hutchison Essar. The deal took place in Cayman Islands. The Indian government claimed over US$2 billion were lost in taxes. In September 2007, a notice was sent to Vodafone. Vodafone claimed that the transaction was not taxable as it was between two foreign firms. The government claimed that the deal was taxable as the underlying assets involved were located in India. In India, the real discussions on GAAR came to light with the release of draft Direct Taxes Code Bill (popularly known as DTC 2009) on 12 August 2009.

On 20 January 2012, the Supreme Court of India gave the verdict in favour of Vodafone, saying that Vodafone did not owe any capital gain taxes. On 16 March, GAAR was presented to the Parliament by Pranab Mukherjee, who stated that its objective was to counter aggressive tax avoidance schemes.

Summary

The regulation allows tax officials to deny tax benefits, if a deal is found without any commercial purpose other than tax avoidance. It allows tax officials to target participatory notes. Under GAAR, the investor has to prove that the participatory note was not set to avoid taxes. It also allows officials to deny double taxation avoidance benefits, if deals made in tax havens like Mauritius were found to be avoiding taxes.