GAAR Â stands for General-Anti-Avoidance Rules and it has been introduced in India due to VODAFONE case ruling in favour of this company by the Supreme Court.
Indian Government is trying to give powers to income tax authorities as implementation of GAAR provides tremendous powers to deny tax benefit to an entity if a transaction has been carried with the sole intention of tax avoidance. Due to powers in the hand of taxmen, now innocents may be harassed by them.
However, the ambiguous language, the lack of details, and the sudden onset of the provisions have been among the factors that have upset foreign investors.
To make it easier to understand GAAR; we can say that suppose a person or a company is setting up business in Gulf Country and its clear intention is to claim exemption from capital gains tax, in such a scenario Indian govt has the right to deny the legitimate claim for exemption provided under DTAA as it falls under tax avoidance and Indian govt is trying to plug the loopholes.
Here are few salients facts about General Anti Avoidance Rules (GAAR)
A local or foreign taxpayer will also be able to approach authorities in advance for a ruling on their potential tax liabilities, Mukherjee proposed.
An independent member would be in the GAAR approving panel, while one member would be an officer of the level of Joint Secretary, or above, from the Ministry of Law.
A committee would be constituted under the Chairmanship of the Director General of Income Tax, with the task of providing recommendations by May 31 for formulating the rules and guidelines to implement GAAR provisions.
On the proposed retrospective amendment in tax rules, Mukherjee said the changes will not override the provisions of double-tax avoidance treaties India has with 82 countries.
The retroactive changes will only impact those cases where a deal has been routed through low-tax and no-tax countries with whom India does not have tax treaties.
The proposed retrospective changes in tax rules will not be used to reopen cases where assessment orders have already been finalised, Mukherjee said.
Mukherjee proposed to reduce long-term capital gains tax on private equity firms on the sale of unlisted securities to 10 percent, from 20 per cent currently, and bring the tax rate in line with what is charged from foreign portfolio investors.
The finance minister also proposed to cut the withholding tax to 5 per cent from 20 per cent currently on funding through foreign loans for “all businesses.” The budget in mid-March had proposed a lower withholding tax for some sectors.
Mukherjee proposed to extend the tax exemption on long-term capital gains related to the sale of unlisted securities in an initial public offering. The levy of the Securities Transaction Tax would be levied at the rate of 0.2 per cent on the sales of unlisted securities.
Finance Ministry sources told NDTV on Thursday that there is no indication of GAAR being dropped, as it will mean changes in the Finance Act.
The ministry put out a comprehensive draft of new guidelines for General Anti-Avoidance Rules on Thursday. Releasing the draft guidelines, the finance ministry committee stated that non-resident investors of FIIs will be exempt from the rules, and also called for a monetary threshold from which GAAR will be implemented.
According to the draft, GAAR will come into effect from April 1 2013. According to the guidelines, FII not opting for treaty benefits and ready to pay taxes will not come under GAAR, but those who do opt for dual taxation avoidance agreements will come under its purview.
The key issues  under the proposed GAAR are:
Tax avoidance has been widely defined with the objective to encompass a number of circumstances and instances of tax avoidance, leading to uncertainty and extensive litigation.
GAAR can be invoked where obtaining a tax benefit is the ‘main purpose’, and it is not clear as to what is meant by ‘main purpose’; the courts would be left to decide whether in the given facts the main purpose of the transaction/arrangement was to obtain tax benefit.
Where an adjustment is made (invoking GAAR), it is not clear whether the full effect of the same would be given to ensure that there is no double taxation.
The onus of proving that an arrangement has not been carried out for the main purpose of obtaining a tax benefit is with the taxpayer, while the tax authorities may not have any evidence of tax avoidance.
There is no cut-off date for applicability of GAAR provisions to any arrangement and, therefore, where the impact of past arrangements continues in Direct Tax Code regime; the same may still be covered by GAAR irrespective of the fact that the arrangement has been approved by the tax officer or subjected to judicial review.