General Anti-Avoidance Rules

‘General Anti-Avoidance Rules’ has been introduced under Domestic Tax Laws. It has the same meaning as “anti avoidance rules based on general principles in law” except that it is codified and included in the legislation. According to its provisions, the Commissioner empowered to declare an arrangement as an impermissible avoidance arrangement (IAA) if:

•The whole, a step or a part of the arrangement has been entered with the objective of obtaining tax benefit, and

•The arrangement:

‒Creates rights and obligations not normally created in arm’s length transactions, or

‒Results in direct or indirect misuse or abuse of the provisions of the code, or

‒Lacks commercial substance in whole or part, or

‒Is not bonafide

The onus of proving that the purpose of a transaction is not to avoid taxes is on the assessee. The presumption applies even if the main / overall purpose of the arrangement is not to obtain a tax benefit and only if a step / part of the arrangement is to obtain a benefit.

It is believed that Income-tax officers have been handed discretionary powers that are far-reaching. This will seriously complicate tax administration and has the potential to increase corruption manifold.

In South Africa, GAAR was introduced in 2006, and is apparently the inspiration behind Indian provisions. In Netherlands and Canada, with similar provisions, the burden of proof lies on the tax authorities. In Australia the application determined on the basis of 8 test or factors.