The General Anti-Avoidance Rules (GAAR) have been de-mystified upon the issuance of the final report of the expert committee and its acceptance by the finance minister with certain variations.
The final report carries the suggestions of the first draft with changes mainly in the following aspects. First, to ensure more independence in the functioning of the approving panel, the jurisdictional chief commissioner/commissioner would not sit in deciding a case where their direct subordinates were involved as assessing officers.
Second, an appropriate mechanism has been recommended to be provided to ensure confidentiality of information of the taxpayer.
And third, when a tax officer has to decide an application for lower withholding but the taxpayer is not willing to submit a satisfactory undertaking, it has been recommended that the tax officer be given the power to inform the taxpayer, with prior approval of the commissioner, of his likely tax liability in the eventuality of invocation of GAAR in the assessment proceedings of the payee. The prospect of GAAR proceedings being initiated at the withholding stage itself should have best been eliminated, because once tax avoidance is suspected on the basis of a preliminary understanding, it would most likely result in the invocation of GAAR at the stage of assessment. The committee has sought to justify this on the basis that India has primarily a source-based system of taxation and some assurance of collection may be necessary. It is not very clear what “assurance of collection” would be met by the power to inform the taxpayer of his likely liability in case GAAR is invoked at the assessment stage.
Almost simultaneously with the publication of the final report of the expert committee, the finance minister made a public statement that the major recommendations of the committee have been accepted ‘with some modifications’. To start with, the finance minister has accepted deferral of GAAR by two years, compared to three years as recommended by the expert committee. GAAR is now scheduled to take effect from the financial year beginning April 1, 2015. Hopefully, by the time GAAR is implemented, we would have attained the maturity in tax administration and have built the capacity for implementation of such a law.
Agreeing to replace ‘main purpose or one of the main purposes being tax avoidance’ with ‘main purpose being tax avoidance’ is a step that brings a balance in invoking GAAR.
Giving due importance to three major factors in determining commercial substance,