Sukumar Mukhopadhyay: GAAR – General Anti Avoidance Rule in Income Tax Law

The General Anti Avoidance Rule has drawn as much attention when the earlier Finance Minister was in place as it has made now when the PM has become the FM. It is clear that the Rule was the baby of the earlier FM and not owned by the new incumbent, though he was and is the PM. It also is reported that in the bureaucracy no body wants to own it except possibly the hapless Joint Secretary who drafted it. The government is going to issue a new modification by amending the Rules but in the meantime let us see all about what really the GAAR is.

   What is GAAR in principle

        In income tax there is an ongoing controversy on the difference between avoidance and evasion .  Avoidance is supposed to be within the law whereas evasion is not legal. There are famous judgements1 of the Supreme Court which have settled the principle that no judicial interpretation should be made in such a way that it encourages evasion. There are varying and uncertain judicial pronouncements also.

              In the present Budget of 2012-13, the Finance Minister, therefore, wanted to put beyond doubt the controversy on this count by introducing General Anti Avoidance Rule in the Income Tax Law, which would end all such controversy and clearly specify where exactly the Revenue would prove certain aspects whereas the tax payer would prove certain other aspects.  It involves the question of burden of proof.

  The normal principle settled by all judicial decisions2 is that avoidance and evasion have to be proved by  Revenue.   However, the burden of proof in some

 circumstances can be on the assessee. The burden shifts also.

            Therefore the background of this GAAR is that unnatural problem needs  unnatural solution. There is rampant avoidance of tax prevailing by aggressive tax planning with the use of sophisticated structures which cannot be checked by the existing legal provision where the burden of proof is on the Revenue.  The GAAR has, therefore, been proposed and passed by Parliament with this in view to check sham transactions.  

International Experience


            In the UK , the position is that the Government has accepted the recommendation of the Aaronson report of November 2011that a General Anti-Abuse Rule targeted at artificial and abusive tax avoidance schemes would improve the UK’s ability to tackle tax avoidance. The Government is taking action to bringing forward legislation in Finance Bill 2013.   In Switzerland  GAAR has not been adopted but there are general principles that it is considered as a “tax avoidance by abuse of law” if certain conditions aare proved by Government. There is no anti-tax haven rules. In EU many European Union Member States have their own anti-avoidance rules, but in practice, the rules do not wholly determine the scope of their tax avoidance provisions.  Australia  has got statutory GAAR.  It is much like the proposal in India.   The United States has no anti-avoidance rule or abuse of law doctrine, but employs a judicial sham doctrine. In Canada there is General  Anti Avoidance Rule and separate Provincial Anti Avoidance Rule particularly in Ontario.  So we may say in an overall manner that in EU and USA, there is no GAAR but in UK, Canada, China and Australia it is there. Even in EU it is there partially and in principle. So the international experience is in favour of India.

Original proposal of GAAR in India

         In the present Budget of 2012-13 presented on 16th March 2012 the Finance Minister proposed GAAR to be effective from 1st April 2013.  This has been done by incorporating Chapter X-A -- General Anti-Avoidance Rule which contains Sections 95, 96, 97, 98, 99, 100, 101 and 102.   The main features of the this proposed regime are the following:

(i)         An arrangement whose main purpose or one of the main purposes is to obtain tax benefit and which also satisfies one of the four tests, can be declared as an “impermissible avoidance agreement”. 

(ii)        The four tests referred to in (i) above are the following:

(These are enshrined in Section 96 of the Income Tax Act)

            (a)        The arrangement creates rights and obligations which are not normally created between parties dealing at arm's length [Section 96 (1)(a)].

            (b)        It results in misuse or abuse of provisions of tax laws [Section 96 (1)(b)].

            (c)        It lacks commercial substance (separately defined in a subsequent paragraph) and is deemed to lack commercial substance [Section 96 (1)(c)].

       (d) Is carried out in a manner which is commonly not employed for bonafide purpose [Section 96 (1)(d)].

(iii)       It shall be presumed that obtaining of tax benefit is the main purpose of an arrangement unless otherwise proved by the tax payer.  [Section 96(2)]

            It is this Section 96(2) and the portion written in italics above (unless otherwise proved by the tax payer) which has created the most severe controversy.  The argument of the tax payers is that the burden of proof that the transaction is not sham has been thrown back to the tax payer.  This is just the opposite of the accepted principle of burden of proof.  The view of Revenue is that enough precaution has been built  into the system by separate procedure for invoking GAAR so that there is no frivolous invocation . 




     Parliamentary Standing Committee Report

       The Committee Chaired by Yashwant Sinha, reported  on the Direct Taxes Code  (DTC) Bill, 2010 and made some very significant observations and constructive recommendations on GAAR and  as well .The committee has desired that the genuine apprehensions of stakeholders should be constructively addressed while finalising the GAAR as contained in the Bill. 

Amended GAAR

            Due to the intense criticism on the above two grounds namely shifting of burden of proof and too much of discretion to tax officials, the Finance Minister has made some concessions which have not watered down the main theme. 

             While the Budgetary debate started in the Parliament on 7th May 2012, the  Finance Minister announced that he was amending the GAAR after examining the recommendations of the Standing Committee on GAAR provisions in the DTC Bill 2010.  Some details of the amendment are the following:

(i) Remove the onus of proof entirely from the taxpayer to the Revenue Department before any action can be initiated under GAAR.  The Finance Minister has done this by deleting Section 96(2) which was “It shall be presumed that obtaining of tax benefit is the main purpose of an arrangement unless otherwise proved by the tax payer”. 

(ii) Introduce an independent member in the GAAR approving panel to ensure objectivity and transparency. One member of the panel now would be an officer of the level of Joint Secretary or above from the Ministry of Law.

      To provide more time to both taxpayers and the tax administration to address all related issues, the Finance Minster proposed to defer the applicability of the GAAR provisions by one year. The GAAR provisions will now apply from 1st April 2014.

              What finally the Finance Minister has done in the Budget by deleting Section 96(2) of the proposed Finance Bill is the following .  Now the proposed  Section 96(3) has become 96(2).     Even this Section has an element of burden on the tax payer while the initial burden is on the Revenue.  Revenue has to first prove that a part of the arrangement is to obtain a tax benefit, while the presumption will follow next that the whole arrangement is for obtaining tax benefit.  This presumption will have to be disproved by the tax payer. So the burden of proof comes back to the  tax payer. Thus a part of the burden still rests with the tax payers.


            From the international experience it is quite clear that many important countries have got similar GAAR provisions. So far as the burden of proof is concerned, the position now is that Revenue will make out a prima facie case to establish that the transaction is sham.  Then only Revenue will invoke GAAR.  The procedure for the invoking is quite in favour of the tax payers. After this any objection to GAAR is like asking for the Freedom to Evade.