The Parthasarathy Shome committee has recommended that the implementation of the controversial General Anti-Avoidance Rules (GAAR) be deferred for three years.

One may get the impression that this is the last we have heard of it for some time.

But GAAR exists even now, if not in the statute book, then through the principle being enshrined through judicial pronouncements.

In the recent Vodafone case judgement, the Supreme Court said, “The concept of GAAR is not new to India since India already has a judicial anti-avoidance rule. The litigation that has happened so far has only been because of lack of clarity and absence of appropriate provisions in the statute on when judicial anti-avoidance rules would apply.”

Discretionary power

According to GAAR, a transaction which lacks commercial substance or was not bona fide but merely done for the purpose of tax avoidance would trigger this provision.

Besides, the Income-Tax officials would enjoy a right to deny tax benefit on these grounds. This discretionary power evoked fear of arbitrary interpretation and discriminatory enforcement and led to strong protests.

At the core of this GAAR controversy is an ideological issue. Which is superior — form or substance of the transaction?

Can transactions be arranged within four corners of law in such a way as to minimise tax incidence?

Perhaps yes — since that falls within the ambit of legitimate tax planning. But where a series of transactions are arranged in such a manner as to arouse suspicion that the whole scheme has no commercial substance but is merely a device for avoiding tax, the courts can disregard the form. This is the principle that comes out in the famous Ramsay as well as McDowell cases.

Vodafone case

In the Vodafone case, the Supreme Court observed that the Income-Tax Department could always apply the ‘substance over form’ principle or ‘pierce the corporate veil’ if they establish that a transaction is a sham or tax avoidant.

While doing so, it has to ‘look at’ the entire transaction as a whole and not adopt a dissecting approach.

The ghost of GAAR has not therefore been exorcised. Its spectre will continue to be felt through the ‘look at’ approach of the taxman as a judicial anti-avoidance principle.

GAAR has been designed to expose ‘seeming compliance’ under some guise or the other. GAAR may not be there yet, but JAAR (judicial anti-avoidance rule) is very much there.

So, the long and short of it is this: don’t breathe easy.

(This article was published on September 14, 2012)
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