New probe begins into use of GAAR rules

The revenue department has been investigating companies and entities that may have used methods to avoid paying taxes under the Anti-tax avoidance law, General Anti-avoidance Rule GAAR. A Hyderabad-based company, Ekge Retail has received a notice in which the department applied Section 96 1 d of the Income-tax Act, which deals with impermissible agreements undertaken to avoid taxation. The high court for the state of Telangana at Hyderabad has challenged the applicability of the section for some transactions undertaken by it in 2018 and 2019. The notice was sent to the company in February 2022. GAAR was first introduced in 2012 but it was considered controversial and there was a demand that the government put in proper checks and balances. The process by which GAAR notices can be issued is now being defined by the government. Before issuing a notice, a tax officer must escalate the matter to a tax commissioner. If the commissioner is convinced, it will be forwarded to a panel that will have to give its approval before any action is taken. The investigation came months after the government established a panel to look at these cases in January of this year. The section on one hand questions the manner of entering a transaction by the taxpayer, while the circular issued by CBDT in 2017 clarifies that GAAR will not play with the right of the taxpayer per se on the manner of implementing a transaction, said Rahul Garg, managing partner of tax and regulatory consultants Asire Consulting. The government could come up with detailed guidelines to avoid litigation due to the fact that the reach of GAAR is not just cross-border transactions but any domestic arrangement as well. The GAAR framework was put in abbreviation for a while, presumably due to the pandemic, and the fresh investigations mean that several M&As or corporate transactions could now be questioned if they are designed as part of tax planning. Tax experts point out that GAAR has existed in its current form in the regulations since 2017 -- 18 but its effective implementation started this year only after the constitution of the panel. The main objective of the panel is to make sure that it is treated fairly and to avoid subjectivity at the level of officers to pick up cases, according to experts. GAAR would take effect if the tax department thinks that some transactions in or outside India were set up or done to avoid paying income tax. A company that wants to set up an office in another country or do a merger or acquisition as part of tax planning could attract GAAR.