GAAR Report submitted by the Shome Committee to the Finanace Ministry

The GAAR report was submitted on 1 September 2012 to the finance minister of India by the Shome Committee constituted by the Central Board of Direct Taxes, after the approval of Prime Minister of India. The committee in its report has tried to create a balance in between the investors being invited to the country and protection of the tax base from tax avoidance and evasion, using aggressive tax planning. The major findings of the GAAR’s committee to create a balance in between the investors and chances of tax avoidance and evasion includes:
1. Tax Evasion, Tax Mitigation and Tax Avoidance
2. Overcharging Principle Applicability of GAAR
3. Monetary Threshold
4. Arm’s Length Test
5. Test to Misuse or Abuse the Provisions of Act
6. Factors for determination of Commercial Substance
7. Grandfathering of existing Investments
8. GAAR will not override the CBDT circular 789 of 2000 with respect to the tax-treaty in between India and Mauritius
9. GAAR will not be applicable at places where so ever anti-avoidance provisions are in existence in the treaty of tax and any type of anti-avoidance rule exists in the Act
10. Impermissible Avoidance arrangements
11. Tax abolition in cases of gains that rises out by the transfer of listed securities
12. Foreign Institutional Investors
13. Corresponding adjustments
14. Implementation of the Onus on the revenue authority
15. Tax Withholding
16. Definition of the term Connected Person
17. Constitution of approval panel
18. Time limit for GAAR provisions
19. AAR to pass ruling within 6 months
20. Prescription of Statutory forms
21. Implementation issue
22. Reporting requirements

The committee in its findings has stated that the GAAR guidelines should be introduced in the country at the time of economic stability. Hence, it has recommended the postponement of its implementation by 3 years. Committee’s recommendation also states about the implementation of the findings with complete spirit and has laid emphasis on transition period of the taxpayers and preparedness of the administrators. To provide clarity on GAAR’s applicability provisions in different situations 27 illustrations were made and are mentioned under different conditions like:
1. Tax Mitigation- GAAR can’t be invoked
2. Tax Avoidance- SAAR is applicable hence GAAR is not invoked
3. Court Approved Amalgamations or demergers
4. Tax Avoidance- GAAR invoked
5. Tax Evasion can directly be dealt of law without invoking the GAAR
Following the Finance Act 2012, the introduction of the General Anti-Avoidance Rules (GAAR) was done into the Income Tax Act, 1961. The committee briefly analysed the provisions of GAAR as per the inputs available from stakeholders and following the recommendations made the amendments in the Act were made for finalization of the guidelines for the Income Tax Rules, 1962.

Shome’s Committee:
The expert committee on GAAR (General Anti-Avoidance Rules) was constituted under the Chairmanship of Dr. Parthasarsthi Shome with members, namely Shri N. Rangachary (Former Chairman of IRDA and CBDT), Dr. Ajay Shah (Prof. NIPFP) and Shri Sunil Gupta (Joint Secretary-Tax Policy and Legislation, Department of Revenue) for undertaking the consultations of stakeholders and finalization of guidelines for GAAR. The main objective of the committee was to get feedbacks from the stakeholders and prepare new guidelines or to amend the previous guidelines after examining the things finely.The committee was constituted by the Central Board of Direct Taxes after being approved by the Prime Minister of India.

The committee formed referred to following terms:
• To receive feedback from both public and stakeholders on the Guideline of GAAR mentioned on the website of Government of India.
• To rework on the guidelines following the feedback received and examining the same and then publish the same in form of second draft
• To find out and finalise, guidelines along with an road-map for implementation of GAAR and submit it to the government

Analysis of the GAAR provisions:
The provisions for the GAAR are mention in Chapter X-A (Section 95 to 102) of the Act. Presented provisions allow the authority of tax, despite of containing anything in the Act with clear declaration on the arrangements made for assesses (estimated value, nature or extent of amount of the fine) that has entered into the impermissible avoidance arrangement to face the consequences with regard to the tax liability determined by the arrangement.