The DTC(Direct tax code) proposes to introduce GAAR(General Anti-Avoidance Rule) as a deterrent and a tool against tax avoidance. GAAR is a broad set of provisions that have the effect of invalidating an arrangement that has been entered into by a taxpayer with the main objective of obtaining tax benefit. The Tax Authority, in such cases, is granted the power to adjust the assessment of the taxpayer so as to counteract the attendant tax advantage.
GAAR was strongly objected to on account of its sweeping nature and granting of vast powers to the Tax Authority to invoke GAAR arbitrarily.There were also no legislative and administrative safeguards for genuine taxpayers against the abusive use of GAAR by the Tax Authority.
The RDP(revised discussion paper) clarifies that the proposed GAAR provisions do not envisage that every arrangement for tax mitigation would be liable to be classified as an impermissible avoidance arrangement, but only where, besides obtaining tax benefit, it also satisfies one of the following conditions:
- It is not at arm’s length.
- It represents misuse or abuse of the DTC.
- It lacks commercial substance.
- It is entered into or carried on in a manner not normally employed for bona fide business purposes.
In addition, the RDP proposes the following safeguards for invoking GAAR:
- Issue of guidelines by the Indian administrative authority to provide for the circumstances under which GAAR may be invoked.
- To be invoked only where tax avoidance is beyond a specified threshold.
- Availability of Dispute Resolution Panel forum.