If GAAR is not implemented properly it may result in “tax terrorism”. Examine how and its impact on Indian economy and ease of doing business? (200 Words)
The idea of GAAR became popular in the backdrop of Vodafone tax case. GAAR is General Anti Avoidance Rules made to prevent intentional tax avoidance by manipulating tax laws. It empowers the Income Tax dept. to investigate any deal or joint ventures which involves huge capital. However the announcement of GAAR created havoc in Capital market and is believed might lead to tax terrorism. Main reasons were:
  1. The arbitrary method to investigate any commercial deal.
  2. Due to the possibility of retrospective taxation
  3. Vagueness of tax laws might be used against a particular company e.g. recent Vodafone case of transfer pricing . Under GAAR they have much more power.
Impact on economy:
  1. Less investment by foreign companies so less growth.
  2. Reduced employment
  3. Poor service delivery as less competition.

Impact on ease of doing business:
  1. GAAR will weaken the investors‘ faith in stability of Indian tax regime.
  2. Cost benefit analysis favors delay in implementation unless properly detailed and acceptable norms are formed.
  3. One big case like Vodafone may have ripple effect on investor’s confidence.

As Shome panel recommended we should delay its implementation for now and should strive towards a stable and predictable tax regime, avoid retrospective taxation and work to provide a transparent business environment in Indian economy.
Why in news?
  • The Central Board for Direct Taxes (CBDT) has announced that the General Anti-Avoidance Rule (GAAR) will start from April 1, 2017 to check tax evasion and avoidance.
  • GAAR was announced as part of the 2012-13 Budget speech of the then Finance Minister Pranab Mukherjee.
  • However, its implementation was repeatedly postponed because of the apprehensions expressed by foreign investors.
  • Main apprehension among foreign investors is over provision in GAAR allowing the government to retrospectively tax overseas deals involving local assets.
  • Foreign investors fear that government may tax participatory notes (p-notes), which could attract a tax rate of up to 15%

Related Notes:

General Anti Avoidance Rule (GAAR)

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