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General Anti-Avoidance Rules

India and International perspective


Internationally, tax avoidance has been recognized as an area of concern and several countries have expressed concern over tax evasion and avoidance. This is also evident from the fact that either nations are legislating the doctrine of General Anti-Avoidance Regulations in their tax code or strengthening their existing code.

In India, the proposed Direct Tax Code 2010 (DTC 2010 or Code) seeks to address the issues relating to tax avoidance and evasion by bringing in General Anti-Avoidance Rules (GAAR) in addition to various transaction-specific Special Anti-Avoidance provisions.

The Discussion paper issued along with the proposed new tax code states that tax avoidance arrangements adopted by taxpayers span across several tax jurisdictions, and it is desirable to introduce GAAR that would serve as a deterrent to the use of increasingly sophisticated forms of tax avoidance by taxpayers.

The paper also states that the appellate authorities and Courts have cast a heavy onus on the revenue authorities for dealing with matters of tax avoidance, especially when the relevant facts are in the exclusive knowledge of the taxpayer who chooses not to reveal them.

The introduction of GAAR regulation recognizes that it may not always be feasible for the judiciary to address the unforeseen implications of transactions carried out for tax purposes and also the need to provide some semblance on the matter of tax avoidance. However, where tax benefit is to be considered as the sole criterion (as is currently recognized under the proposed new Code) for determining tax avoidance, such a provision may undermine the common denominator in determination of a tax avoidance scheme, i.e., the principle that though the taxpayer is free to choose the most tax efficient method, the commercial justification for the choice taken and tax consideration (benefit) is not the only reason.