GAAR (General Anti-Avoidance Rule)

What is GAAR?

The GAAR full form is General Anti-Avoidance Rule. GAAR is a regulatory scheme used to fight against the aggressive approaches of tax planning. It is mostly used for business schemes or transactions created to avoid taxes. It works as a shield to prevent individuals or companies from using the legal loopholes to skip paying their portion of taxes.

GAAR was introduced in India primarily on April 1, 2017. The main objective of GAAR is that all taxpayers are treated equally and fairly when it comes to transactions that focus on reducing tax obligations. These rules ensure that people do not use various strategies to avoid paying taxes.

How does GAAR work?

Here are the ways in which GAAR operates in India:

• The assessing officer firstly identifies a potential case of GAAR and then reports it to the tax commissioner.
• The tax commissioner notifies the taxpayer about the case after verifying it. The case should qualify as an Impermissible Avoidance Arrangement (IAA).
• Now, the taxpayer has to submit the documents to showcase that the arrangement is not an IAA, and he/she should protect their case.
• If the tax commissioner is not satisfied with the documents submitted by taxpayers, they refer the case to the Approving Panel.
• After reviewing all the matters, the approving panel provides the binding orders to the taxpayers and tax authorities.
• Lastly, the assessing officer has to provide a final order to the taxpayers based on the directives given by the Approving Panel. These orders conclude the whole assessment process of GAAR.

Provisions of GAAR

The provisions of GAAR are given below:

• The main target of GAAR is the arrangements that are made to gain the tax benefits or those that do not have any real commercial value. This measure ensures a proper examination of these arrangements for tax purposes.
• GAAR not only catches those who try to avoid taxes, but it also comes in when the common principles of business are ignored to take the tax advantages.
• General Anti-avoidance tax rule only applies to foreign investors who haven't used their benefits under the Double Taxation Avoidance Agreement (DTAA).