This document provides an overview of India's general anti-avoidance rules (GAAR). It discusses the evolution of GAAR in India from proposals in 2009 to its implementation in 2012. It also summarizes key Supreme Court rulings that shaped the distinction between permissible tax planning and impermissible tax avoidance in India. The document concludes by noting remaining areas where GAAR guidelines could provide more clarity and objectivity.

1. Indian General
Anti-Avoidance
Rules
An Overview
Dinesh Kanabar
7 July 2012

2. How it all Started?
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3. Evolution
Pre-GAAR Era
Jurisprudence
Tax Planning vs. Tax Avoidance vs.
Tax Evasion / Form vs. Substance
Treaty Shopping
Specific
Anti-avoidance
Rules
Thin Capitalization
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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4. Tax Planning vs. Tax Avoidance vs. Tax Evasion
‘Roller Coaster’ from “post-independence” to 2011…… 60+
years … 7 Apex Court decisions !!
Arvind
Narottam
1967
Azadi Bachao
Andolan
1988
Raman & Co.
2003
1985
McDowell
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1989
Playworld
Electronics
Vodafone
2012
2010
Walfort
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5. Tax Planning vs. Tax Avoidance vs. Tax Evasion
Raman & Co. (1967)
“Avoidance of tax liability by so arranging commercial affairs
that charge of tax is distributed is not prohibited. A taxpayer
may resort to a device to divert the income before it accrues
or arises to him. Effectiveness of the device depends not
upon considerations of morality, but on the operation of the
Income-tax Act. Legislative injuction in taxing statues may
not, except on peril of penalty, be violated, but it may lawfully
circumvented”
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6. Tax Planning vs. Tax Avoidance vs. Tax Evasion
McDowell (1985): “Constitutional Bench” decision
“Main” judgment of Ranganath Misra (on behalf of Full Court)
 Permissible: Tax planning within legal framework
 Impermissible: ‘‘Colourable devices’, ‘dubious methods’
and ‘subterfuges’ under the guise of planning
“Supplementing” decision by Chinappa Reddy ( post
concurrence with “majority” decision!!)
Blurred distinction between “tax avoidance” and “tax
evasion”
Dismissed observations in Raman & Co
Chinappa Reddy’s view:
Reopened debate of Ramsay vs. Duke of Westminister
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7. Tax Planning vs. Tax Avoidance vs. Tax Evasion
Aftermath of “McDowell”:
‘Implied’ opposition to Chinappa Reddy’s view
Arvind Narottam (1988)
“....no amount of moral sermons would change people’s attitude to tax
avoidance”
Playworld Electronics (1989)
“One should avoid subverting the rule of law”
Battlelines drawn for “correct” reading of McDowell
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8. Tax Planning vs. Tax Avoidance vs. Tax Evasion
Azadi Bachao Andolan (2003)
• Chinappa Reddy’s “radical” view militates against the majority
judgment
• Raman & Co (1967) “relevant even today” / Duke of Westminister
“alive” & “kicking”
Every arrangement reducing the tax burden not to be looked down
Attempts to reverse Azadi
• Review petition filed before the two member Supreme Court Bench:
Dismissed in January 2004
• Curative Petition placed before a five member Supreme Court Bench:
Dismissed in limine in December 2004
Correctness of Azadi Bachao Andolan still doubted !!
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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9. Tax Planning vs. Tax Avoidance vs. Tax Evasion
Walfort (2010) reaffirms Azadi Bachao Andolan
“Even assuming that the transaction was pre-planned there was
nothing to impeach the genuineness of the transaction. With regard to
the ruling in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 1482 (SC), it
may be stated that in the later decision of the Supreme Court in Union
of India v. Azadi Bachao Andolan [2003] 263 ITR 706 it has been held
that a citizen is free to carry on its business within the four corners of
the law. That, mere tax planning, without any motive to evade taxes
through colourable devices
is not frowned upon even by the
judgment of the Supreme Court in McDowell & Co. Ltd.’s case
(supra)”
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10. Tax Planning vs. Tax Avoidance vs. Tax Evasion
Vodafone (2012)….finally lays to rest “McDowell spirit”
 No conflict between McDowell and Azadi Bachao Andolan
 Chinappa Reddy’s views only in the context of “artificial and
colourable devices”
 Reaffirmed Westminister: Courts cannot go behind a genuine
document to some supposed underlying substance
 Preferred “look at” over “look through”
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11. Tax Planning vs. Tax Avoidance vs. Tax Evasion
-- Post Vodafone...
High Energy Batteries (Madras HC): “Sale and Lease Back”
 Transaction of sale and lease back not sham.
 “Look at” principle applied
AAR Ruling: Buyback of shares
 “Tax Avoidance” / “colourable device”
 Results in “dividend” and not “capital gains”
Debate intensifies ……rather than subsiding !!
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12. Treaty Shopping / Thin Capitalisation
Treaty Shopping - Azadi (2003) / Vodafone (2012)
 Treaty Shopping permissible
 Treaty benefit to be denied only on account of LOB Article / Antiavoidance rules in the domestic law
Thin Capitalization - Besix Kier (2010)
 Re-characterization of Debt as equity not permissible in absence
of Thin Capitalization Rules
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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13. Pre GAAR Era - Specific Anti-avoidance Rules
Deemed Dividend
Clubbing of Income
Stamp duty value of land and building
Deemed Gift
Transfer Pricing
Dividend / Bonus Stripping
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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14. GAAR – Around the world
 Growing international concern over tax evasion and tax
avoidance
 Global economic slowdown resulting in lower tax
collections – Governments looking to widen tax base
Australia
South Africa
UK (Proposed)
2006
1981
2011
GAAR
1988
Canada
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independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
2008
China
2013
India
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15. Indian GAAR
15

16. Evolution of GAAR
es
lin
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ui
12
G
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ra
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28
a
Fin
,
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Ma
201
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Sta
28
nce
Doctrine of “substance
over form”
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9M
arch
12
DT
C
DT
20
09
C
20
–
10
12
–
Au
30
g
09
Au
g
10
Finance Bill 2012
16 Mar 12
Modeled on South
African GAAR
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independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
Vodafone’s “six
factor test” nullified
Finance Minister in Budget
Speech
“I propose to introduce GAAR
in order to counter aggressive
tax avoidance schemes….”
Explanatory Memorandum to
Finance Bill, 2012
….keeping in view the aggressive
tax planning with the use of
sophisticated structures, a need for
statutory provisions so as to codify
the doctrine of "substance over
form"……
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17. GAAR
-- Comparison of key provisions
Particulars
DTC 2009
Implementation
Date
1 April 2011
DTC 2010
1 April 2012
1 April 2013
Taxpayer
Tax Authorities
Taxpayer
Taxpayer
Scope
Wide
Wide
Reference to
approving
panel
NO
Commissioner
Option to
obtain AAR
ruling
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independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
NO
Finance Act
2012
1 April 2012
Onus of
proof
Final authority
to invoke
GAAR
Finance Bill
2012
NO
Commissioner
NO
Wider than DTC
Wider than DTC
yes
yes
Approving Panel
(Only
Commissioners)
Approving Panel
(Commissioners
+ Jt.Secratary)
NO
YES
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18. Indian GAAR – A Snapshot
“Main purpose” or one of the “main purposes” is to obtain a “tax benefit”
AND
Not at
“arm’s-length”
OR
“Misuse/abuse" of
tax provisions
OR
Lacks “commercial
substance”
OR
Not for bona-fide
purposes
Impermissible Avoidance Arrangement (IAA)
Consequences
Disregard / combine /
re-characterize whole /
part of the arrangement
Disregard
corporate
structure
Deny treaty
benefit
Re-assign place
of residence /
situs of assets or
transaction
Re-allocate
income,
expenses, relief,
etc.
Re- characterize
Equity- Debt, Income,
Expenses, relief, etc.
Applies to both Indian Residents and Non-Residents
GAAR to override Treaties
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independent member firms affiliated with KPMG International Cooperative (“KPMG
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19. GAAR Guidelines
 Committee formed under the chairmanship of DGIT (IT)
 “Draft” guidelines
 Issued on 28 June 2012 with 21 illustration:
 PM’s review pending…. Will GAARs be….deferred....diluted…. or
deleted?
 Positives
 Clarity in meaning of “connected person”
 GAARs to apply to FIIs and not to “P-Note” holders
 Obliterating fears on section 96(2): Consequences of treating part of an
arrangement as “impermissible”
 “Tax Mitigation” permissible
 Thin Capitalisation applicable only qua “connected persons”
 Overseas investments: Non-applicability of GAARs to parking of
dividends
2% Rise in rupee… 439 points rise in BSE Sensex on 29 June!!
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independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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20. More to be done
Increased objectivity
Define “direct or indirect” / “misuse or abuse” / “bonafide
purpose” / “commercial substance”
Recommendation of Parliamentary Standing Committee:
Interplay of GAARs and Tax Treaties
Increased clarity on GAARs vs. SAARs
Key: Implementation at
“ground level” / Increase
India’s attractiveness as an
investment destination
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independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
Grandfathering: Non-applicability to “pre-2013”
structures
20

21. Hope is eternal…
Finance Minister’s Speech while introducing GAAR provisions
“I propose to introduce a General Anti-Avoidance Rule in order to counter aggressive tax avoidance
schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel”
Finance Minister during in Lok Sabha debate
“… It is not made for harassment. It is not for harassing the honest taxpayers but we shall have to take
action against those who are taking advantage to avoid taxes…”
Parliamentary Standing Committee Report
Due consultative process with all stakeholders would be followed before guidelines will be formulated
Finance Secretary to ET (7 May 2012):
"It won't be easy for assessing tax officers to invoke GAAR”
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independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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22. Questions
…
Answers…
&
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