GAAR Full Form
What is the full form of GAAR?
GAAR stands for General Anti-Avoidance Rule. General Anti-Avoidance Rule is an anti-tax avoidance law of the Indian government to prevent tax evasion. Tax plays an essential part in a country’s development as taxes are major revenue sources for the government. But everyone wants to save their money from taxes. To do that, people adopt malpractices to avoid tax. GAAR is introduced as a method to prevent tax evasion and leakages. It was implemented by the Indian government after the famous Vodafone International case of 2007.
What is General Anti-Avoidance Rule (GAAR)?
General Anti-Avoidance Rule (GAAR) is an anti-tax avoidance law brought up by the government of India as a preventive measure against tax evasion and tax avoidance. GAAR has been introduced in chapter X-A of the Income Tax Act of 1961.
In 2012, Pranab Mukherjee, one of the former finance ministers and President of India, introduced GAAR during the budget session. So, GAAR was introduced by the Finance Act of 2012, which made any malpractice to receive tax benefits a punishable offence.
Why was GAAR introduced?
The core significance of GAAR is to prevent tax avoidance so that the government do not have to bear revenue loss due to such activities. One more reason for introducing GAAR was the Vodafone international case, the biggest tax sensation in Indian history.
Vodafone wanted to expand its business in India by associating with Hutchison Essar, but to avoid tax, it took an indirect route. Vodafone bought CGP Investment Holding, situated in the Cayman Islands, which holds a 67% stake in Essar. After court sessions in the supreme court, the decision was in Vodafone’s favour.
It is estimated that the government of India has to bear the loss of USD 2 billion. So, it was high time to implement GAAR. GAAR has finally effectively implemented in April 2017.
How does GAAR work?
The work procedure of GAAR is a multiple-step procedure starting with referring the potential case to the Tax Commissioner by the Assessing Officer. The Income Tax Commissioner issues a notice to the taxpayer based on whether the arrangement comes under an impermissible avoidance arrangement (IAA).
Then, the taxpayer has to prove that his tax arrangement does not come under impermissible avoidance arrangement (IAA) supporting essential documents. If the Income Tax Commissioner is not satisfied with the explanation, he forwards the case to the Approving Panel.
The Panel further examines the case and provides their feedback. The assessing officer makes an order to the taxpayer.
Criticism against GAAR
Every law comes with some criticism, and so does GAAR. GAAR has faced backlash from many citizens due to its strict rules and regulations. Companies also fear that the tax authorities may harass them even if they are honest taxpayers.
In response, the Standing Committee in 2012 added that GAAR provisions should also ensure that companies with an honest tax arrangement should not be harassed.
Frequently Asked Questions (FAQs)
When a company does not pay tax to the government, it is tax evasion, while tax avoidance is the avoidance of tax by taking the help of some legal resources.
The income Tax Act of 1961 introduced the General Anti-Avoidance Rule (GAAR).
The impermissible avoidance arrangement (IAA) depicts that the taxpayer intended to avoid tax and obtain a tax benefit.
Article 256 of the Indian constitution permits the government to collect taxes from Indians.
It is the act which allows the collection, administration, and recovery of Income tax by the Indian government.