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Even as Parliamentary Panel frowns on the notorious DTC provisions, Budget gives it a mischievous back-door entry!

             While presenting his Budget 2012, the Union Finance Minister referred to the ‘Report on the Direct Taxes Code (DTC) Proposals’ received from the Parliament’s Standing Committee on Finance and observed that, “we will examine the Report expeditiously and take steps for the enactment of DTC at the earliest.”

             However, it has come as a huge shock that grossly ignoring the critical concerns of the Committee in regard to the ‘General Anti Avoidance Rules’ (GAAR) and its strong recommendations for thoroughly amending GAAR, the original GAAR proposals as packaged in the DTC Bill have been most mischievously given a back-door entry in the Income-tax Act through clause 40 of the Finance Bill, 2012.

             This is indeed a grave impropriety, reflecting sheer disrespect towards the 31 member Parliamentary Panel, headed by former FM Yashwant Sinha, who devoted great time and effort in hearing the views and representations of both tax payers and tax professionals on one hand and the officials of the Finance Ministry on the other and after extensively deliberating on the same, submitted their well reasoned recommendations on the subject.


             The stated objective underlying GAAR is to plug tax avoidance and prevent a taxpayer from using legal construction or transactions to gain undue fiscal advantage. In this context, the GAAR proposals, as proposed, seek to empower the Income-tax authorities, to invoke GAAR and declare an arrangement, whose main purpose or one of the main purposes is to obtain a tax benefit, as an ‘impermissible avoidance arrangement.’

             While even under the most stringent legislations like the criminal law, an accused is presumed to be innocent until he is proved to be guilty, the most notorious feature of GAAR is the huge burden cast on the taxpayer, by providing that, “It shall be presumed that obtaining of tax benefit is the main purpose of an arrangement, unless otherwise proved by the taxpayer.”

             Highlighting serious concerns on GAAR, the Standing Committee has noted in its report that some very stringent provisions relating to GAAR have been proposed in the Code, which have been criticized and fears expressed in various quarters about the unfettered discretion these provisions vest in the tax authorities. “The Committee desire that the genuine apprehensions of stakeholders should be constructively addressed while carrying out amendments in the Code.”


             The Parliamentary Panel has, in its elaborate recommendations on GAAR, advised the Finance Ministry and CBDT to bring greater clarity and preciseness to the scope of GAAR. In the Committee’s view, the onus should rest on the tax authority invoking GAAR and this should not be shifted to the taxpayer.

             Strongly recommending that GAAR requires to be amended accordingly and guidelines need to be framed, keeping in view the afore-stated concerns, the Committee has desired that that the following aspects should be carefully considered before finalizing the GAAR proposals:

  • The provisions to deter tax avoidance should not end up penalizing taxpayers who have genuine reasons for entering into a bonafide transaction.

  • Frivolous cases should be avoided for which a threshold may be prescribed under the Rules.

  • GAAR provisions are subject to approval of Dispute Resolution Panel (DRP), which as proposed is a collegium of three Commissioners. Since this is a purely departmental body, it will be fair and just if the review is done by a more independent body headed by a Chief Commissioner and two other Members, who are independent technical persons.

  • A threshold limit for specific amount of tax may be prescribed for application of GAAR, which may be reviewed with experience.

  • It would also be fair to apply GAAR provisions prospectively, so that it is not made applicable to existing arrangements or transactions. Alternatively, suitable grandfathering provisions may be made to protect the interest of the taxpayers who have entered into structures or arrangements under the existing law.

  • Taxpayers may also be permitted to obtain an Advance Ruling to determine whether any kind of transaction would fall within GAAR.

  • Uncertainties with regard to applicability of tax treaty provisions should be removed so that India’s credibility as a reliable treaty partner is not affected.

  • The proposals should not lead to any fiscal uncertainty or ambiguity. It should be ensured that any of the proposals does not pave the way for avoidable litigation, which is already at a very high level in tax matters.


            What has happened is unprecedented in India’s taxing history. GAAR as proposed, if passed unchanged via the Finance Bill, could well prove to be a draconian legislation. The Parliamentary Panel has already expressed its grave anxiety and concern in the matter. The FM needs to listen to their voice. It is also need of the hour that taxpayers rise, protest and convey to the FM that if required, they would even crusade for the cause of their fair rights and freedom! Forget not, taxpayers, we are living in the world’s largest democracy!

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