GAAR

Team Members Arun Kumar Rushali Lokhande Kamiya Gulati

08 August 2013

Contents
Contents

Background Existing Tax laws in India What is GAAR? GAAR in India Proposed GAAR & its Objective Key Issues! Effects & Afterthoughts Shome Committee proposals & Status Vodafone case Conclusions
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GAAR

Background
GAAR- Background

Tax avoidance like tax evasion, seriously undermines the achievements of the public finance objective of collecting revenues in an efficient, equitable and effective manner Thin line differentiates Tax Planning, Tax Benefit, Tax Avoidance and Tax Evasion. Individual or Organizations tend to save on taxes. Loop holes in tax laws

GAAR

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Existing Tax Laws in India

Direct Tax
Income Tax Wealth Property Corporate Etc.,

Indirect Tax
Excise Duty Sales Tax Service Tax Custom Duty Etc.,

SAAR Specific Anti Avoidance Rules : SAAR is a set of rules which target specific known arrangements of tax avoidance.

GAAR

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What is GAAR?
GAAR General Anti Avoidance Rules GAAR denies the tax benefits to Transactions/ Arrangements. GAAR is not a new word- Countries like Australia, Canada, Germany, France & South Africa have GAAR More than 30 Countries have introduced GAAR Other Emerging Economies have started introducing GAAR.

GAAR

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GAAR in India
Liberalized economy- since 1991. Increase in FDI Increase in number of Shell companies in Countries with Low or No Tax and having DTA or treaty with India Indian Business becoming GLOCAL Need for robust tax laws to counter tax avoidance

GAAR

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Proposed GAAR- DTC 2010

GAAR to be invoked on satisfaction of prescribed conditions:
an arrangement to obtain a tax benefit transactions not at arms length misuse or abuse of the provisions of DTC Lacking commercial substance defined to include situations where there is a:
Significant tax benefits without significant effect upon business risk or net cash flows Legal substance or effect differs from legal form It involves or includes: Round trip financing Any accommodating or tax indifferent party

GAAR

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Proposed GAAR- Objective

Insist upon the principal of. substance over form, Bar companies from aggressive tax planning. Effectively counter the taxpayers out of the box thinking in devising new means of tax avoidance. Target tax evaders.

GAAR

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Key Issues
GAAR provision is sweeping in nature. Grants discretion to the tax authorities Has broader application and lacks clarity The onus of proving innocence is with taxpayer. There is no cut-off date for applicability of GAAR provisions. GAAR can be invoked on past arrangements irrespective of the fact that the arrangement has been approved by the tax officer or subjected to judicial review.
GAAR

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Effects & After thoughts !

Effects: FIIs pulled out over a One Billion US$ from Indian Market Indian Rupee depreciated to a new low Indian Stock market went numb State of depression in Indian companies. Internal and External Pressures After thoughts: GAAR was postponed to at least 2013 Expert Committee under Dr.Parthasarthi Shome formed Shome Committee submits draft proposal in Sept 2012 & final recommendations in Oct 2012
GAAR

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Shome Committee Proposals

EC Proposals- Highlights

Overarching principle Deferment of GAAR 3 years Monetary threshold of Rs. 3 crores Grandfathering of Investments Main purpose test Provide negative list of transactions

GAAR

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Shome Committee Proposals contd..

EC Proposals- Highlights

SAAR vs GAAR GAAR vs Limitation of Benefit clause (LOB) Withholding of taxes Definition of connected persons Constitution of Approving Panel Reporting Requirement Investors of FIIs

GAAR

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Vodafone case- An Example

The bone of contention was whether transfers of shares of a foreign company which indirectly held shares of an Indian company was taxable in India.

GAAR

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Vodafone case- An Example

GAAR

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Vodafone case- An Example

GAAR

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Vodafone case- An Example

Key Principles Emanating from SC Ruling
Tax Planning with in the framework of law is permissible Separate Entity Principle Look At Test Look Through Provision Situs of Shares of CGP Certainty is integral to rule of law
GAAR

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Look At Test
To ascertain the true legal nature of the transaction Factors to be kept in mind when applying this test
the concept of participation in investment the duration of time during which the holding structure exists the period of business operation in India the generation of taxable revenues in India the timing of Exit the continuity of business on such exit

GAAR

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Look Through Provision

Scope of Section 9 so as to cover Indirect transfer of Capital Assets contention by Revenue Authorities Section 9(1)(i) of the Act explained that income dealt with in each sub clause is distinct & independent of the other Section 9(1)(ii) refers to the income arising from transfer of capital asset situate in India No use of words Indirect transfer
GAAR

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Conclusion

GAAR A make or Break Situation

GAAR

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Philosophy teaches a man that he can't take it with him; taxes teach him he can't leave it behind either.

~Mignon McLaughlin,
The Second Neurotic's Notebook, 1966

GAAR

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