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FEASIBILITY OF GAAR FOR REMOVING THE PRACTISE OF TAX AVOIDANCE

A project proposal made by

Name: Sanjeev Kumar
Roll No. - 1558
Batch: B.A. LLB
Submitted to: Dr. Ganesh Prasad Pandey

A final draft submitted in partial fulfillment of the course Taxation Laws -I during the Academic
Session 2019-20, 7th Semester

21th August, 2019

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CHANAKYA NATIONAL LAW UNIVERSITY

Nyaya Nagar, Mithapur, Patna
DECLARATION

I hereby declare that project work reported in B.A. LLB entitled “FEASIBILITY OF GAAR FOR
REMOVING THE PRACTISE OF TAX AVOIDANCE” under Intellectual Property Law
submitted by me at Chanakya National Law University in an authentic record of my own work,
carried out under the supervision of Dr. Ganesh Prasad Pandey for the partial fulfillment of the
course Taxation Laws. This project work is not submitted elsewhere for any other degree in any
Institute or University. I am fully responsible for the contents of my project report.

SANJEEV KUMAR
B.A.LLB BATCH
ROLL NO. 1558
7th SEMESTER
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CONTENTS

ACKNOWLEDGEMENT………………………………………………………(4)

OBJECTIVES OF THE STUDY……………………………………………….(5)

HYPOTHESIS…………………………………………………………………….(5)

RESEARCH METHODOLOGY………………………………………………..(5)

SOURCE OF DATA COLLECTION…………………………………………..(5)

SCOPE OF THE STUDY………………………………………………………..(5)

TENTATIVE CHAPTERIZATION
1. INTRODUCTION………………………………………………………………(6)
2. GAAR IN INDIA………………………………………………………………..(8)
3. IMPACT OF GAAR……………………………………………………….…..(11)
4. JUDICIAL DECISION………………………………………………………..(14)
5. CONCLUSION…………………………………………………………………….(16)
6. BIBLIOGRAPHY………………………………………………………………….(17)
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ACKNOWLEDGEMENT

I owe the present accomplishment. This project, although prepared by me, is a culmination of
efforts of lots of people.

Firstly, I would like to thank our faculty of environmental law Dr. Ganesh Prasad Pandey,
Assistant Professor of Law for his valuable suggestions towards making of this project.

Further, I would also like to express my gratitude towards my friends who helped me for the
completion of this project.

Last, but far from the least, I would express my gratitude towards the Almighty for obvious
reasons.
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OBJECTIVE OF STUDY

• To make descriptive and legal study about GAAR.

• To provide adequate information about GAAR.

• To understand the different aspects of GAAR.

HYPOTHESIS

• GAAR (General Anti-Avoidance Rules) is a tool for checking aggressive tax planning
especially that transaction which is entered into with the purpose of avoiding tax.

RESEARCH METHODOLOGY

• Researcher relied upon doctrinal method e.g. books, internet, journals etc.

• Researcher mainly relied upon library based study.

SOURCE OF DATA COLLECTION

• PRIMARY SOURCE- Statutes, precedents & other official judgment.

• SECONDARY SOURCE- websites, articles, books, journals etc.

SCOPE OF THE STUDY

Due to lack of time, researcher’s work is wholly based on doctrinal method. This research will be
useful for the purpose of publication.
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INTRODUCTION

There has been extensive debate about the implementation of General Anti-Avoidance Rules
(GAAR) across different jurisdictions. The need for GAAR is felt because it is believed that such
provisions will improve the integrity of the taxation system and legitimise the interests of taxpayers
as well. This research paper discusses what are avoidance provisions, their origin, and how they
are different from evasion and planning. It analyses the taxation regime in different nations,
particularly India. The Vodafone case has been studied in detail and the recommendations of the
Shome Committee have been scrutinised to suggest an effective way for the implementation of
GAAR.”1

Tax avoidance means taking undue advantage of the loopholes, lacunae for Reducing tax liability
and thus avoiding payment of tax which is lawfully payable. Generally, it is done by twisting or
interpreting the provisions of law and avoiding payment of tax. Tax avoidance takes into account
loopholes of law. Though it has a legal sanction it means following the letter of law but Killing the
spirit of law. Example sale and lease back of assets, so that the depreciation is diverted but the
assets remain with assesse. Tax evasion means avoiding tax by illegal means. It involves
suppression of facts, falsifying records, fraud or collusion.

The Parthasarathy Shome panel was formed by PM of India in 2012, for chalking out the final
guidelines on GAAR and to bring about tax clarity and address the concerns of foreign investors.
Instead of just FIIs, the panel was asked also to look into issues pertaining to all non-resident tax
payers.2

General Anti-Avoidance Rule (GAAR) is specific Anti- avoidance rule. The term GAAR was used
in India, in 2008 when the then finance minister P. Chidambaram introduced Direct tax code draft
provisions. In 2014, Arun Jaitley inserted the GAAR in Income Tax Act but it became applicable
from 2017 and the assessment year is 2018-19 and not before that. GAAR states that when a

1
https://www.lawctopus.com/academike/the-need-for-gaar/ (last visited 218/19)
2
https://www.thehindu.com/https://www.thehindu.com ›(last visited 218/19)
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taxpayer makes a strategy which is not normally done in normal commercial sense then the
provisions of GAAR is attracted. Assessing officer will invoke GAAR and the oficer will

inform commissioner and commissioner will state it to a panel. The essence of GAAR is substance
over form.
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GAAR IN INDIA

The provisions of GAAR override provisions of Income Tax Act and provisions of Double taxation
avoidance agreements. Generally, tax avoidance is legally permissible, if it is within the four
corners of the Act, and is not a colorable device.3 However, many tax planning/ avoidances are
prima facie in conflict of the objectives of the Act or may be primarily designed to reduce the tax
liability.

The provisions of this chapter shall apply in addition to, any other basis for determination of tax
liability. Specific Anti- Avoidance Rule would be applicable in respective cases. Examples of
SAAR are clubbing of income, depreciation.

GAAR would apply in respect of tax benefits in aggregate by all enterprises out of an arrangement
in an assessment year exceeds ₹ 3 Crores.

SECTION-95: Applicability of GAAR-

GAAR provides that an arrangement entered into by an assesse may be declared to be an

impermissible avoidance agreement and the consequence in relation to tax arising there from may
be determined subject to provisions of this chapter. GAAR provisions are applicable from
assessment year 2018-19. The section starts with notwithstanding clause, it means in case of
conflict this section shall prevail over other conflicting provisions.

Section 96- impermissible avoidance agreement

1. Impermissible avoidance agreement means an arrangement which satisfies two conditions:- (a)

main purpose is to obtain tax benefits

3
https://incometaxindia.gov.in/https://incometaxindia.gov.in › Communications › Circular
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(b) it :

i. Creates rights/ obligation which are not ordinarily created between persons dealing at
arm's length or

ii. Results whether directly or indirectly in misuse or abuse of provisions of this Act or iii.
Entered in a manner, which are not ordinarily employed for Bona-fide purposes

iv. Lacks commercial substance

v. Deemed to Lack commercial substance

Under section 97(1) a transaction shall be deemed to Lack commercial substance if substance of
transaction differs significantly from its form. If a person purchases a property and lease back it to
the same person then in form there is no lease back. It's done merely to claim depreciation. So here
the substance and form is different.

2. The only purpose of such transaction is to obtain tax benefits and there's no substantial
commercial purpose for selecting such transaction. Many a times location is done merely for
tax avoidance.

3. Arrangement doesn't significantly affect business risk of any party to the arrangement but only
attributes tax benefits.

4. Transaction involves:

1. Round tripping, which includes any arrangement in which, through series of transactions:-

(a) funds are transferred among parties

(b) Such transaction have no substantial commerical purpose than obtaining tax benefits.
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A group company in profit obtain loan from market and gives loan to be for businesses purposes.
This is round tripping.

It's irrelevant that the funds involved in round trip financing can be traced to any funds transferred
or received. The time and sequence in which funds are transferred received are irrelevant and also
the mode in which funds are transferred or received.

2. the main reason for participation of party is to obtain tax benefits.

3. Elements have the effect of cancelling each other. Examples are cross gifts.

4. A transaction conducted through one or more persons and disguises the value of
location/source/ownership/ control of funds.
• Further it has been provided that following shall be irrelevant for deciding whether a transaction
lacks commercial substance or not:-

1. Period for which transaction exist

2. Fact of payment of taxes, directly or indirectly, under the arrangement

3. Fact that an exit route is provided by arrangement.

This section further provides that while treating a transaction as impermissible avoidance
agreement-

i. An equity may be treated as Debt or vice versa

ii. Capital receipt may be treated as revenue receipt or vice versa
iii. Expenditure/ deduction/ relief/ rebate may be characterized.
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IMPACT OF GAAR

The introduction of GAAR in India is a turning point as the GAAR deals with transactions or
business arrangements or planning which are dubious in nature, particularly the transaction which
has no commercial purpose like round tripping. Government introduced GAAR after the Vodafone
case when Supreme Court held that the Income Tax Act do not allow authorities to collect taxes
from Vodafone on the acquisition4. Till now no single case has been dealt under GAAR. It is an
anti-avoidance rule. GAAR has been made effective in India from April 1. 2017.

General Anti-Avoidance Rule (GAAR) is an anti-tax avoidance regulation of India. It was

introduced by then Finance Minister, Pranab Mukherjee, on 16 March 2012 during the Budget
session. In India, the actual discussions started on 12th-Aug-2009, when the draft of Direct Taxes
code Bill (DTC) released. The General Anti Avoidance Rule (GAAR) provisions effective from
the Assessment Year 2018-19 onwards, i.e. Financial Year 2017-18 onwards.5

Avoidance means an attempt to reduce the tax liability through the legal means i.e. to regulate your
affairs in such a way that you tend to pay the minimum tax imposed by the Act as opposed to the
maximum. In Tax Avoidance, tax reduction is done legally but in Tax evasion, it is done illegally,
like through falsifying of books, suppression of your income, etc.In Tax Avoidance, tax reduction
is done legally but in Tax evasion, it is done illegally, like through falsifying of books, suppression
of your income, etc. The implications of GAAR is that the Income- tax department will have
powers to deny tax benefit if a transaction was carried out exclusively for the purpose of avoiding
tax.

The Parthasarathy Shome panel was formed by PM of India in 2012, for chalking out the final
guidelines on GAAR and to bring about tax clarity and address the concerns of foreign investors.

4
https://m.economictimes.com/https://m.economictimes.com › Industry › Telecom ( last visited 22/8/19)
5
https://dor.gov.in/https://dor.gov.in › sites › default › files › Measures_Tackle_BlackMon... ( last visited 22/8/19)
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Instead of just FIIs, the panel was asked also to look into issues pertaining to all non-resident tax
payers.

Defer implementation of GAAR by 3 years. The threshold of tax benefit is Rs.3 crores & additional
with changes in 1962 Income Tax Rules. GAAR should not appeal to inspect the

realness of the residency FII from Mauritius. The government should hold the provisions of the
CBDT circular that was issued in the year 2000 on acceptance of TRC (Tax Residence Certificate)
issued by Mauritius government.

GAAR should apply "only in cases of abusive, contrived and artificial arrangements". The Shome
Committee has proposed to do away with short-term capital gains tax by increasing the transaction
tax. The Approving panel is Five-member committee, two members must be nongovernment
persons & of renown from the fields of Accountancy, Business or Economics. The other two
members must be chief commissioners of IT dept., chaired by a retired High court judge.

It will apply only to investments made after August 30, 2010. GAAR will not apply to Flls that do
not claim any double taxation avoidance treaty benefit. GAAR Will be Invoked If any arrangement
is found to be impermissible under GAAR, it will be denied treaty benefits.6

Under section 95, it is stated that any arrangements may be declared as impermissible avoidance
agreement. Thus, the initial burden is on the Assessing officer to treat the transaction as an
impermissible avoidance agreement.

Under section 98, it is stated that if any arrangement is decided to be Impermissible avoidance
agreement then the consequences shall be determined in such manner as is deemed appropriate in
the circumstances of the case. The circumstances of the case may result in denial of any tax benefit

6
Supra note 4.
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under DTAA. The impact of treating a transaction as Impermissible avoidance agreement may
result into following illustrations situations:-

(a) Disregarding, combining or re-characterizing any step in, or a part or whole of the
Impermissible avoidance agreement

(b) Treating the IAA as if it hadn't been entered into

(c) Treating any accommodating party and any other party as one

(d) Deeming person who are connected person in relation to reach other to be one and the Same
person for the purpose of determining tax treatment of any amount

(e) Reallocating amongst the parties to the arrangement-

i. any accrual, of a capital or revenue nature or

ii. any expenditure, deduction relief or rebate

(f) Treating

1. The place of residence of any party to the arrangement or

2. The situs of an asset or of a transaction at a place other than the place of residence, Location of
assets or location of transaction as provided under the arrangement or

(g) Considering or looking through any arrangements by disregarding any corporate structure.
(lifting of corporate veil/ disregarding the alter-ego)
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JUDICIAL DECISION

Vodafone International Holding vs Union of India

Facts leading to the Dispute

Vodafone International Holding (VIH) and Hutchison telecommunication international limited or
HTIL are two non-resident companies. These companies entered into transaction by which HTIL
transferred the share capital of its subsidiary company based in Cayman Island i.e. CGP
international or CGP to VIH.

VIH or Vodafone by virtue of this transaction acquired a controlling interest of 67 percent in Hutch
is on Essar Limited or HEL that was an Indian Joint venture company (between Hutchinson and
Essar) because CGP was holding the above 67 percent interest prior to the above deal.

The Indian Revenue authorities issued a show cause notice to VIH as to why it should not be
considered as “assesse in default” and thereby sought an explanation as to why the tax was not
deducted on the sale consideration of this transaction.

The Indian revenue authorities thereby through this sought to tax capital gain arising from sale
of share capital of CGP on the ground that CGP had underlying Indian Assets.

VIH filed a writ petition in the High Court challenging the jurisdiction of Indian revenue
authorities. This writ petition was dismissed by the High Court and VIH appealed to the Supreme
Court which sent the matter to Revenue authorities to decide whether the revenue had the
jurisdiction over the matter. The revenue authorities decided that it had the jurisdiction over the
matter and then matter went to High Court which was also decided in favour of Revenue and
then finally Special Leave petition was filed in the Supreme Court.7

Issue before the Supreme Court

The issue before the Apex court was whether the Indian revenue authorities had the jurisdiction
to tax an offshore transaction of transfer of shares between two non-resident companies
whereby the controlling interest of an Indian resident company is acquired by virtue of this
transaction.

7
https://www.lawsenate.com/case-studies/vodafone-international-holding-vs-union-of-india.html
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Arguments of Revenue
The revenue submitted that this entire transaction of sale of CGP by HTIL to VIH was in substance
transfer of capital assets in India and thus attracted capital gain taxes transaction led to
transferring of all direct/indirect rights in HEL to VIH and this entire sale of CGP was a tax
avoidance scheme and the court must use a dissecting approach and look into the substance and
not at “look at” form of transaction as a whole.

Decision of the Court

Sale of CGP share by HTIL to Vodafone or VIH does not amount to transfer of capital assets within
the meaning of Section 2 (14) of the Income Tax Act and thereby all the rights and entitlements
that flow from shareholder agreement etc. that form integral part of share of CGP do not attract
capital gains tax.

The order of High Court of the demand of nearly Rs.12, 000 crores by way of capital gains tax
would amount to imposing capital punishment for capital investment and it lacks authority of law
and therefore is quashed.

Conclusion
The apex court pronounced a landmark judgment in Vodafone International Holding v. Union of
India and cleared the uncertainty with respect to imposition of taxes. The apex court through this
judgment recognized:

 The principles of tax planning.

 Business entities or individual may arrange the affairs of their business so as to reduce
their tax liability in absence of any statutory stipulation prohibiting the same.
 The multinational companies often establish corporate structures and all these structures
should be established for business and commercial purposes only.
 The corporate veil may be lifted in case facts and circumstances reveal that the
transaction or corporate structure is sham and intended to evade taxes.
 The transactions should be looked holistic manner and not in a dissecting manner and the
presence of corporate structures in tax neutral/investor friendly nations should not lead
to the conclusion that these are meant to avoid taxes.

In the end, it can be said that this judgment has helped in removing uncertainties with respect to
imposition of taxes and recognized the principle the if motive of the transaction is to avoid tax
does not necessarily lead to assumption of evasion of taxes and the supreme court has endorsed
the view of legitimate tax planning.
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CONCLUSION

It is apprehended that GAAR shall positioned too much of discretionary powers inside the hand of
tax administration within the name of plugging tax avoidance. As it gives unbridled energy to the
tax authorities to question any transactions or preparations, it may bring about boom in tax
litigation. As the burden of evidence is on assessee to show that the object in the back of entering
into a transaction or an arrangement isn't to reap tax gain, the assessee will need to maintain proper
business reason and document the evidences to avoid such conditions.

It is yet to be seen how tax authorities use the special power vested with them under GAAR. The
way in which the “Main Purpose Test” and Clause C (vi) [section 97(1) (c)] of “Tainted Element

Test” have been drafted, global tax planning will take a serious hit. Moreover, the General Anti
Avoidance Rules are res integral and judicial interpretation is yet to be seen. Organisations will
now have to be very careful before taking tax decisions.

Let’s simply desire that these provisions are implemented within the right spirit in area to keep
away from prolonged litigation as inside the case of a few different provisions in which the
authorities are operating greater like departmental officers causing avoidable litigation.
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BIBLIOGRAPHY

1. Abrams, Howard E., and Richard L, Doernberg, Essentials of United States Taxation, The
Hague: Kluwer Law International, 1999.

2. C.H. Gustafson, “The Politics and Practicalities of Checking Tax Avoidance in the United
States” in G.S. Cooper, Tax Avoidance and the Rule of Law, (Amsterdam: IBFD, 1997),
3. Alm, James and Martinez-Vazquez, Jorge, 'Tax morale and tax evasion in Latin America'
(Georgia State University, 2007)
4. Kanga, J. B., N. A. Palkhivala, Dinesh Vyas, and Nandish Vyas, The Law and Practice of
Income Tax, Gurgaon: Lexis Nexis Butterworths Wadhwa Nagpur, 2004.

5. Rohatgi, Roy, Basic International Taxation, London: Kluwer Law International, 2002.
6. Michael Keen, "Taxation and Development—Again" in C. Fuest and G. Zodrow (eds),
Critical Issues in Taxation and Development (London: MIT Press, 2013), 19-20. IMF, et
al. (2011)

7. Vito Tanzi and Howell Zee, "Tax policy for emerging markets: Developing countries"
(2000) LIII Nat'l Tax J. 2, 300. Keen (2013), above fn.28, 19-20. IMF, et al. (2011)

8. Richard Bird and Eric Zolt, "Technology and taxation in developing countries: From hand
to mouse" (2008)