For the purpose of raising the revenues countries across the world introduce various kind and category of taxes. It is the duty of citizen to obey those laws but they can arrange their resources to get profit by tax efficiency. Tax evasion through suppression of facts and creating false facts is illegal. Tax reduction through legal means is increasingly considered a matter of right by taxpayers.
The methods adopted to reduce their tax liability can be broadly put into four broad categories :
- Tax Evasion: It is an illegal practice where a person, organization or corporation avoids paying true tax liability whether it is national or international.
- Tax Avoidance: It is a practice where a person, organization or corporation plans finances so as to apply all exemptions and deductions provided by tax laws to reduce taxable income in a legal framework.
- Tax Mitigation: It is a practice where taxpayer takes advantage of a fiscal incentive provided to him by the tax legislation. For example tax benefit provided in Special Economic Zones.
- Tax Planning: It is a practice by which an organization utilizes its resources an affairs in order to minimize tax liability.
Mauritius is the most preferred route for foreign investments because of the liberal taxation regime in the island country. India has a double taxation avoidance treaty with Mauritius. This Mauritius root is used extensively for such tax avoidance’s. The concept of avoidance has been an area of debate in all over the world and Supreme Court in the case of Vodafone judgment has held tax evasion to be valid provided it is allowed by the law. Australia introduced such rules way back in 1981. Later on countries like Germany, France, Canada, New Zealand, South Africa etc too opted for GAAR.
Anti Avoidance Rules are broadly divided into two categories namely “General” and “Specific”. Thus, legislation dealing with “General” rules are termed as GAAR, whereas legislation dealing with “Specific avoidance are termed as “SAAR”. To minimize the loss of tax to India in the form of tax avoidance the Finance Act 2012 introduced the general anti-avoidance rules (GAAR) in the Income-tax Act, 1961. GAAR is a tool of dealing with international taxation system. So GAAR is a provision which empowers the Revenue Authorities in India to deny the tax benefits of transactions or arrangements which do not have any commercial substance or consideration other than achieving the tax benefit.
The concrete process of introduction of GAAR began with the first draft of the Direct Taxes Code 2009 where it was proposed for the first time. Thereby to expedite the process of introduction of GAAR, Finance Bill 2012 proposed a new Chapter X-A in the extant income tax law- Income Tax Act 1961. The purpose of chapter is to examine the transactions from the point of view of anti-avoidance and to ascertain whether it is ‘impermissible avoidance agreement’.
When the first draft of the GAAR was introduced, it created tension in the financial market. The draft was heavily criticized by the people citing it will have adverse implications on foreign investments. So It forced government to defer the introduction of GAAR by one year to 2013, and approved for constitution of an Expert Committee headed by Dr. Parthasarathi Shome to study the provisions of GAAR. The main objective of the Shome Committee was to get feedback from stakeholders and prepare new guidelines or to amend previous guidelines after examining things finely. The GAAR report was submitted to the finance ministry on 1st September 2012.
Major recommendation of Shome committee is; GAAR guidelines should be introduced in India at the time of economic stability. Hence, it has recommended the postponement of its implementation by three years. Committee made one good recommendation which is of training of tax officers, this particular recommendation aims at establishing a well informed and updated tax department competent enough to take decisions on complex tax arrangements.
Issues with GAAR:
GAAR provides Commissioner of Income Tax, power to look into a business arrangement or a transaction and declare it to be ‘impermissible avoidance arrangement’ and thereby denying tax benefits to the parties. The main problem is that GAAR by its formation provides a large amount of power to the authorities and these provisions might lead to the initiation of arbitrary actions. Same can happen in negligence in the form of not inquiring where there should have an inquiry and the same might cause exchequer a huge loss. I think postponement of implementation of GAAR is a good move by government so that it can be applied when economy of country will be doing good. When it was introduced first time it was little hasty and we were not prepared for it, but in reality this is the tax system which we cannot leave away. In any mature economy it is well required and true in case of India, maybe we need for more suited time.
(References: PTI, GOI press releases, IT Dept.)