GENERAL ANTI-AVOIDANCE RULES

GENERAL ANTI-AVOIDANCE RULES (GAAR) AND ITS
IMPLICATIONS ON INDIAN ECONOMY

3.4 ECONOMICS-I
SUBMITTED TO:
Mr. Sumit Kumar Malviya,
Assistant Professor of Economics

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I

TABLE OF CONTENTS

INTRODUCTION ……………………………………………………………………………………………………… 1
OVERVIEW ………………………………………………………………………………………………………….. 1
CHAPTER-1 ……………………………………………………………………………………………………………… 2
GAAR IN INDIA ……………………………………………………………………………………………………….. 2
1.1 INTRODUCTION …………………………………………………………………………………………. 2
1.2 NEED FOR GAAR ……………………………………………………………………………………….. 2
1.3 HISTORY OF GAAR ……………………………………………………………………………………. 3
1.4 EXCEPTIONS ……………………………………………………………………………………………… 4
1.5 IMPACT ON ECONOMY ……………………………………………………………………………… 4
1.6 MERITS OF GAAR ………………………………………………………………………………………. 5
1.7 DEMERITS OF GAAR …………………………………………………………………………………. 6
1.8 SAAR v. GAAR ……………………………………………………………………………………………. 7
CHAPTER-3 ……………………………………………………………………………………………………………… 8
GAAR IN OTHER COUNTRIES ………………………………………………………………………………… 8
3.1 IN AUSTRALIA ……………………………………………………………………………………………….. 8
3.2 IN CANADA ……………………………………………………………………………………………………. 8
3.3 IN CHINA ………………………………………………………………………………………………………… 9
3.4 IN U.S.A. …………………………………………………………………………………………………………. 9
3.5 IN U.K……………………………………………………………………………………………………………. 10
CHAPTER-4 ……………………………………………………………………………………………………………. 12
GAAR AND LAW …………………………………………………………………………………………………… 12
4.1 PROVISONS OF GAAR IN INDIA ………………………………………………………………….. 12
4.2 GAAR AND FOREIGN INSTITUTIONAL INVESTORS …………………………………… 13
4.3 VODAFONE JUDGEMENT- THE AFTERMATH …………………………………………….. 15

II

CONCLUSION ………………………………………………………………………………………………………… 16
BIBLIOGRAPHY …………………………………………………………………………………………………….. 17
WEB BASED ARTICLES …………………………………………………………………………………….. 17
CASES ………………………………………………………………………………………………………………… 19

1

INTRODUCTION

OVERVIEW

“Taxation is the art of plucking the goose so as to obtain the largest possible amount of feathers
with the smallest possible amount of hissing.” – Jean Baptiste Colbert.
In other words, tax policies are designed to extract the largest possible amount of revenue from
Multi-National Corporations (MNCs) with the least bit of economic and political change.1 One
such tax policy which reflects the traditional debate between tax avoidance and tax evasion is
that of the implementation of the General Anti Avoidance Rules (GAAR) in the Act.2 In
essence, the GAAR is a set of statutory rules which are designed to scrutinize such transactions
and arrangements, which are entered into by the taxpayers with the sole objective to circumvent
their tax liabilities.3Anti-avoidance rules are divided into two main categories: “general” and
“specific.” A general anti-avoidance rule (GAAR) is a set of broad principles-based rules
within a country’s tax code designed to counteract the perceived avoidance of tax. GAAR is a
concept within law that provides the taxing authority a mechanism to deny the tax benefits of
transactions or arrangements believed not to have any commercial substance or purpose other
than to generate the tax benefit(s) obtained. Tax law designed to deal with particular
transactions of concern are termed as either specific anti-avoidance rules (SAARs) or, less
commonly, targeted anti-avoidance rules (TAARs).4 The ultimate purpose of a GAAR is to
stamp out unacceptable tax avoidance practices. A GAAR is typically designed to strike down
those otherwise lawful practices that are found to be carried out in a manner which undermines
the intention of the tax law such as where a taxpayer has misused or abused that law.5

1 Plucking the Geese: Traditional Ways of Raising Tax Do Not Work Well in a Globalized World, The Economist,
(July 08, 2018, 09:10 PM), http://www.economist.com/news/special-report/21596672-traditional-ways-raising-
tax-do-not-work-well-globalised-world-plucking-geese;. 2 Ss. 95 to 102, Income Tax Act, 1961. 3 Sukumar Mukhopadhyay, General Anti-Avoidance Rule in Income Tax Law, Vol. 47 (Issue No. 22) Economic
and Political Weekly, 1 (2012) 4 GAAR rising: Mapping tax enforcement’s evolution, Ernst & Young, February 2013, pp., (May 6, 2018,9:07
AM), . 5 Introducing A General Anti-Avoidance Rule (Gaar), Tax Law IMF Technical Note, Christophe Waerzeggers I
Cory Hillier, vol.1, Jan. 2016, (May 6, 2018, 12:33 PM),

2

CHAPTER-1
GAAR IN INDIA

1.1 INTRODUCTION
The commercialization and industrialization also involve problems of tax avoidance. This has
resulted in an increase in the loss to the national revenue. To deal with this very situation,
General Anti-Avoidance Rule has been proposed in the Indian Legislature.6 General Anti-
Avoidance Rule, most popularly known as GAAR Rules were first introduced in the direct tax
code (DTC). It was first introduced in India by Mr. Pranab Mukherjee, the then Finance
Minister in March 2012. It was announced in the fiancé bill 2012 that it will be reintroduced
with some changes which are required and will be in effect from 1st April 2014. GAAR was
adopted from the south African tax laws. The rule targeted, primarily, all the companies that
were set up in Mauritius as Shell Companies. 7 General Anti-Avoidance Rules (GAAR) have
been codified in the Indian income tax law to counter aggressive tax planning arrangements.
These provisions, empower the Indian revenue authorities to declare an arrangement as an
‘impermissible avoidance arrangement,’ if the main purpose of the agreement is to obtain a ‘tax
benefit’, and the arrangement lacks or is deemed to lack commercial substance.8 An Expert
Panel has been constituted on GAAR to undertake stakeholder consultations to finalize the
guidelines for GAAR. Some provisions of GAAR have attracted a lot of criticism from foreign
investors, therefore main target of setting up of Panel is reviewing provisions of GAAR to
critically analyze the same and try to address the concern of Investors wherever possible,
without defeating the main purpose of GAAR.9
1.2 NEED FOR GAAR
It is important to mention that GAAR is meant to deal specifically with incidence of tax
avoidance and not with incidence of tax evasion. Organization for Economic Corporation and
Development (OECD) has clearly brought out the difference between tax avoidance and tax
6 Sumit Singh Bagri & Uzma Naseem, GAAR – An Indian and International Perspective, 2013 30 taxmann.com
283. 7 UKEssays, Impact of General Anti-Avoidance Rule in India, November 2013, (sept. 3,2018, 10:55 PM),
8 What’s new news flash, PwC, December 2016, (May 6, 2018, 12: 31 PM),
9 Sameeksha Bhola, India: GAAR and new developments, mondaq connecting knowledge and people, (May 6,
2018, 12:16 PM)

3

evasion.10 The introduction of the GAAR can be justified on the ground that revenue collection
is one of the most important rights of the government and associated with this right is the right
to introduce measures like GAAR for ensuring that the incidence of tax avoidance is reduced.
Tax avoidance like tax evasion undermines the achievement of public financing objective of
collecting revenue in an efficient, equitable and effective manner.11 India being an attractive
destination for multinational corporations for investment purpose, it becomes all the more
important to have a well-defined tax legislation. Although there are Specific Anti Avoidance
Rules to deal with specific ways of tax avoidance, yet there are transactions that do not fall
within the bracket of these specific tax avoidances. In order to deal with such tax avoidance
arrangements, GAAR needs to be introduced.12
1.3 HISTORY OF GAAR
The very concept of GAAR can be traced back to Duke of Westminster’s case13. It was this
landmark case that marks the beginning of the concept of substance v. form. Lord Russell in
this case observed that ‘given that a document or a transaction is genuine, the Court cannot go
behind it to some supposed underlying substance.’14 This was followed by several decisions
given by Courts of various countries on the same linbut with different interpretations. This
includes the Ramsay’s case15 which brought about a change in the decision of the Duke of
Westminster’s case. In this case the Court held that the principle of the Duke of Westminster’s
case must not be over extended. If it is visible that a document or a transaction was intended to
be a part of a nexus, then even the form of the transaction cannot prevent it from being regarded
as such. This judgment received its full recognition in the case of Inland Revenue
Commissioner v. Burmah Oil Co. Ltd.,16 wherein Lord Simon observed that Ramsay’s case
brought about a significant change in the role of judicial authorities in tax avoidance cases.
In India, it is ruling in the Mc. Dowell’s case which must be given the credit for bringing the
very concept of GAAR to India. The Court held that ‘tax planning may be legitimate provided
it is within the framework of law. However, a colorable device cannot be a part of tax
10 See, Organisation for Economic Corporation and Development, centre of tax policy and administration,
Glossary of tax terms. 11 Direct Taxes Code, Discussion Paper 2009, by Department of Revenue, Ministry of Finance, Government of
India: . 12 Naseem, supra note 6 at 2. 13 Commissioners of Inland Revenue v. His Grace the Duke of Westminster 1935 All E.R. 259. 14 Rahul Garg and Kaushik Mukherjee, Removing the fences, looking through GAAR,
. 15 W.T. Ramsay Ltd. v. IRC 1981 1 All E.R. 865. 16 Inland Revenue Commissioner v. Burmah Oil Co. Ltd, (1982) STC 30.

4

planning’.17 However, the Indian Government proposed to introduce GAAR through the Direct
Tax Code Bill of 2010. The DTC Bill introduced in the Parliament was referred to the Standing
Committee. The Committee had been set-up under the Chairmanship of Director General of
Income-tax (International Taxation). It made certain specific suggestions with regard to
changes that need to be incorporated in the GAAR provision of the DTC Bill. Thereafter, the
Committee presented the Finance Act, 2012 which made provision for GAAR which
incorporated the provision made under Direct Tax Code Bill, 2010 along with the modifications
suggested by the Committee. Thus, the implementation of GAAR is delayed. It is expected to
come into being from 1st April, 2013.18
1.4 EXCEPTIONS
The GAAR provisions are applicable to income arising on or after April 01, 2017. Gains arising
from transfer of investments made up to March 31, 2017 have been exempt. Further, the GAAR
provisions are not applicable in the following cases:19
? Where the tax benefit from an arrangement in a relevant tax year does not exceed INR
30 million (USD 450,000 approx.);
? Where Foreign Portfolio Investors (FPIs) registered with the Indian market regulator
do not avail any tax treaty benefits;
? Investment made by a non-resident by way of offshore derivative instruments or
otherwise, directly or indirectly through an FPI.
1.5 IMPACT ON ECONOMY
After the announcement made by the Finance Minister in March 2012, there has been a
significant decline in the investments made by foreign entities. There has been uncertainty over
the impact of regulations on the foreign institutional investors. Indian equity markets showed
higher deviations and instability after the announcement as the investors have become cautious
in making their investments. In initial 3 months, markets showed good figures in terms of
investment interest but not so well after the announcement as shown by the figures in the table
below:20

17 Commissioners of Inland Revenue v. His Grace the Duke of Westminster 1935 All E.R. 259. 18 Naseem, supra note 6 at 2. 19 Pwc, supra note 4. 20 UKessays, supra note 3.

5

MONTH GROSS
PURCHASE
(CR)
GROSS
SALE (CR)
NET
INVESTMENT
(CR)
CUMULATIVE
INVESTMENT ($MN)
January
2012
50,467.40 40,109.90 10,357.70 2,037.22
February
2012
79,898.60 54,686.60 25,212.10 5,127.67
March
2012
63,795.10 55,413.80 8,381.10 1,684.82
April 2012 41,091.90 42,200.50 -1,109.10 -205.53
May 2012 6,716.50 5,840.40 876.10 166.21
Source: http://www.indiainfoline.com
The rule targeted, primarily, all the companies that were set up in Mauritius as Shell
Companies. These companies had no motive of doing business in Mauritius. The core motive
was to route investments into India, utilizing the tax friendly treaty signed between the two
nations.21
Due to the changes, the income earned through investments from FII and FDI will now be
taxed. This increases companies total tax liabilities and they will have to revisit their investment
plans.
1.6 MERITS OF GAAR
The provision of GAAR is applicable on all individuals, partnerships and firms, wherever tax
benefit exists from the arrangement.22 It is based on the substance over form doctrine. This
gives the tax authority the power to scrutinize any arrangement that they think might have been
undertaken for the purpose of tax benefit. For instance, the authorities have the power to
question the salary structure if it is suspected that the structure has been chosen primarily for
tax benefit. The real intention of the parties to the arrangement can be identified by studying
the substance of each transaction.23
The proposed GAAR puts the burden of proof on the tax authority to prove that the arrangement
has been undertaken for the purpose of tax benefit and is, therefore, an impermissible avoidance
arrangement.24 This shifts the burden off the shoulders of the taxpayer who would otherwise
21 Ibid. 22 DeepshikhaSikarwar, GAAR effect: Income Tax sleuths can use it to question pay packages that help in
reducing tax, The Economic Times, April 23, 2012 . 23 Ibid. 24 Income-tax Laws Amendment Act (No. 2) 1981, Second Reading Speech, the Hon. John Howard, M.P.
.

6

have been subjected to the harassment by the tax authority to reveal all the information related
to the arrangement. The current provision of GAAR helps in addressing the limitation of
judicial interpretation of the tax laws that helps the taxpayers in escaping the tax liability, even
when the substance of the transaction provides for the tax liability.25
The non-resident investors who cannot be directly taxed for their investments through Foreign
Institutional Investors (FII) can now be indirectly taxed through GAAR. GAAR contains
provisions for taxing the FIIs on behalf of the non-resident investors. Naturally, the FIIs will
recover this tax from the investors.26
1.7 DEMERITS OF GAAR
Government through the introduction of GAAR has provided lot of power to the tax authorities.
They can take the tax benefit out of any transaction if they feel that its sole purpose is avoiding
taxes. This may lead to harassment of honest investors.27 One of the main areas of concern for
investors is that GAAR empowers Tax authorities to declare an arrangement as invalid, if it is
entered into by the assesse with the objective of obtaining a tax benefit. Therefore, under
proposed provisions of GAAR, power given to tax officials is subjective in nature and tax
officials have wide-ranging powers to declare any arrangement as “an impermissible avoidance
arrangement”. Secondly, under GAAR provisions, onus to prove is on the assesse that tax
benefit is not the main purpose of an impugned arrangement. An anti-abuse provision that shifts
the burden of proof on the assesse goes against the fundamental principle of “innocent unless
proven guilty”. Another area of major concern for foreign investors is in the context of
applicability of Double taxation avoidance treaties.28 However, as far as India is concerned, the
rules are so highly ambiguous that since its inception, India has received a lot of condemnation
for it despite its global acceptance especially because it was introduced immediately after the
controversial Vodafone-linked retrospective amendment in 201229 and it was seen as an
attempt on part of the Indian policymakers to deliberately counter the Supreme Court’s decision
and assume control over the situation. Further, these rules were introduced without holding
25 Nigam Nuggehalli, Who Will Guard GAAR? Business Standard, 18th august 2012
26 RaghuvirSrinivasan, GAAR will bite anyway, The Hindu, July 1, 2012 . 27 Ibid. 28 Bhola, supra note 5. 29 Vikas Dhoot, Budget 2015: GAAR on Hold for Two Years, DTC Abandoned, The Economic Times
(01/03/2015),

7

consultations with stakeholders and were therefore perceived as the government’s ploy to
increase its revenue on the pretext of aggressive tax planning.
1.8 SAAR v. GAAR
Similar to GAAR, there exist certain anti avoidance rules which are particular to an issue. They
are referred to as Specific Anti-Avoidance Rules (SAAR). Since the time the provisions of
GAAR were introduced into public domain through draft and committee reports, it has been
argued by the stakeholders that GAAR should not apply where SAARs exist i.e. there are
specific anti-avoidance rules already present in the Act relating to that case. However, this
argument was not accepted and a circular30 specifically addressed this issue by clarifying that
the provisions of SAAR and GAAR can co-exist and are applicable, as may be necessary in
the facts and circumstances of the case. Hence, the position on this issue is a policy one and
not a legal one and a defense to the invocation of GAAR in cases where a SAAR exists will
need to be based on the factors such as existence of arrangement, tax benefit, main purpose,
tainted elements etc.31

30 Circular 7 of 2017. 31 The General Anti-Avoidance Rule Impact on Tax Decision Making, Dhruva Advisors LLP, (Sept. 2, 2018,
01:14 PM), .

8

CHAPTER-3
GAAR IN OTHER COUNTRIES

The provisions of the GAAR are to be found in case of few other countries as well, if not in all
other countries.
3.1 IN AUSTRALIA
The tax anti-avoidance rule for Australia is to be found in Part IV of the Income-tax Assessment
Act, 1936 (ITAA). The Explanatory Memorandum to the Tax Laws Amendment Act (No. 2),
1981 which introduced Part IVA brought out the purpose of bringing in such an arrangement.
It stated that the provision is applicable to those arrangements which are of “blatant, artificial
or contrived kinds” and not to “arrangements of a normal business or family kind, including
those of a tax planning nature.” Further, the second reading speech stated that the provision is
not intended to cast any unnecessary prohibition on legitimate tax planning in managing the
commercial affairs.32
3.2 IN CANADA
The provision of the Canadian GAAR is to be found in section 254 of the Income-tax Act of
Canada. The purpose of GAAR can be drawn from the reading of the explanatory note33 which
says that section 245 aims at preventing abusive tax avoidance arrangement or transactions and
is not intended to interfere with legitimate commercial transaction or family transaction.
The Canadian Revenue Authority (CRA) has a Committee that advises on whether GAAR is
applicable to a particular situation or not? There are following three steps that need to be
fulfilled for attracting the provisions of GAAR in any transaction:34
(i) tax benefit is arising from the arrangement,
(ii) the transaction is an avoidance arrangement, as it has not been organized for any bona fide
purpose other than tax benefit,
(iii) the avoidance transaction is abusive.
32 Income-tax Laws Amendment Act (No. 2) 1981, Second Reading Speech, the Hon. John Howard, M.P.
. 33 The Explanatory Notes to Legislation Relating to Income Tax issued by the Honourable Michael H. Wilson,
Minister of Finance, (June 1988) . 34 Rahul Garg and Kaushik Mukherjee, International Perspectives on GAAR .

9

A comparison of GAAR in India with that of Canada reveals that the provisions are similar in
both the countries.
3.3 IN CHINA
In China, it is the Enterprise Income Tax Law (EITL) that contains provisions of the GAAR.
Several other guidelines have also been issued by the Chinese authorities for implementation
of the GAAR.
EITL provides that “If an enterprise engages in a business arrangement without bona fide
commercial purposes that results in reducing its taxable revenue or taxable income, the tax
bureau has the right to make adjustments based on reasonable methods.”35
Further, the State Administration on Taxation has also issued a Circular on the
“Implementation Measures of Special Tax Adjustments” which contains guidelines for
implementing GAAR. The circular provides that the authorities can undertake actions under
GAAR in case of transactions that amount to abuse of tax incentive, tax treaties, corporate
structure or amounts to use of tax havens for escaping tax liability.36 It is also provided that the
doctrine of substance over form must be applied to determine whether an enterprise has
undertaken transaction only for the purpose of tax benefit or whether there is some bona fide
commercial purpose also involved? This can be done by analyzing the time of the arrangement,
the substance and form of the arrangement, the relationship between each step and also the tax
benefit of the transaction.37 This very provision is in line with the proposed GAAR in India,
which emphasizes on the doctrine of ‘substance over form.”
3.4 IN U.S.A.
USA does not have a general statutory anti-avoidance rule, rather depends on specific anti-
abuse provision along with treaty clauses to deal with tax avoidance. However, in order to bring
about uniformity in tax laws, US enacted section 7701(o) which codified the economic
substance doctrine. The economic substance doctrine has been defined as a common law
doctrine which does not allow certain tax benefit to a transaction that does not have economic
substance or lacks a business purpose. The business purpose test is undertaken to identify
whether the transaction has been undertaken only for tax benefit or it has some other business
35 Article 47 of EITL. 36 Article 92 of the circular. 37 Article 93 of the circular.

10

motive also? Along with this test comes the economic substance test. This test is similar to the
‘business purpose’ test as proposed in India.
In September, 2010, the Large Business and International Division of the Internal Revenue
Service38 issued a directive for ensuring consistency in application of economic substance
doctrine. It said that in case of application of the doctrine, it must be approved by the
appropriate director of field operation at the examination level. The examiner must study the
circumstance, i.e., must follow the substance over form doctrine to identify whether the
doctrine is to be applied or not? The examiner also needs to inform the taxpayer that the
examiner is thinking of applying the economic substance doctrine. Further, if the various
conditions for applying the doctrine given in the directive are applicable and the examiner feels
that the doctrine must be applied, then the taxpayer must be given sufficient time to explain his
position either in writing or in person explaining his position whether the doctrine must be
applied or not?39
Thus, even if USA does not have general anti-avoidance rule, it has legislations that work in
the same manner as the general avoidance rule in other countries in ensuring that incidence of
tax avoidance is reduced.

3.5 IN U.K.
UK does not have any general anti-avoidance provision. The taxpayer is allowed to choose any
transaction that will create least tax liability but it will have the same legal and economic
consequences. The domestic law has legislations for dealing with specific unavoidable tax
avoidance incidences.
A study group was constituted to analyze the need of GAAR in the UK.40 The study showed
that introducing GAAR would not be beneficial for the UK. This is because it will put a curb
on the ability of the business to choose sensible tax planning that will be beneficial for the
38 LB&I Directive :Guidance for Examiners and Managers on the Codified Economic Substance Doctrine and
Related Penalties dated 15 July, 2011. . 39 Internationals perspective on GAAR, United States of America, . 40 Graham Aaronson QC, GAAR study to introduce it in UK- www.hm-treasury.gov.uk /
tax_avoidance_gaar.htm>.

11

taxpayer as well. However, it suggested that introducing GAAR for dealing exclusively with
abusive tax arrangement would prove to be of help.
Both, UK and India, stand on the same footing as of now. Both these countries do not have any
anti-avoidance rule. However, there is a big gap in the approach of both these countries for
introducing GAAR. In UK, GAAR is being introduced with consultation from members of the
tax department and the general public. India needs to learn this lesson from the UK.

12

CHAPTER-4
GAAR AND LAW

4.1 PROVISONS OF GAAR IN INDIA
Chapter X-A of the Finance Act, 2012 contains provisions of the GAAR. Under the proposed
GAAR, any arrangement entered into by an assessee41 may be declared to be an impermissible
avoidance arrangement and the consequence of entering into such an arrangement may be
determined from the proposed provisions.42
Further, the Act says that an arrangement can be called as an impermissible avoidance
arrangement, if the main purpose or one of the main purposes of entering into such an
arrangement 43 is to obtain tax benefit and such an arrangement creates rights, or obligations,
which are not ordinarily created between persons dealing at arm’s length; results, directly or
indirectly, in the misuse or abuse of the provisions of this Act; lacks commercial substance or
is deemed to lack commercial substance and is not carried out in a bona fide manner.44 The
onus of proving an arrangement as an impermissible avoidance arrangement is on the Revenue
authorities.45 However, once the revenue authorities prove that the arrangement is an
Impermissible Avoidance Arrangement, then the burden of proof shifts on the taxpayers to
prove that the arrangement was entered into with a bona fide business purpose.
No prescribed norm has been laid down in the proposed GAAR to determine the main purpose
of an arrangement. Reference, therefore, needs to be drawn from GAAR of other countries.
The South African Revenue Services (SARS) Draft Guide to GAAR46 provides that the main
purpose can be determined by analysing the facts and circumstances of the arrangement and
not merely by the subjective purpose of the taxpayer in entering into such an arrangement, at
the time of entering into the arrangement or subsequently.

41 As per the sub-section (7) of section 65 of the Finance Act, 1994 (Chapter V), ‘assessee’ means a person liable
to pay Service Tax and includes his agent. 42 Section 95 of the Finance Act, 2012. 43 Section 102(1) of the Act: Arrangement means any step in, or a part or whole of, any transaction, operation,
scheme, agreement or understanding, whether enforceable or not, and includes the alienation of any property in
such transaction, operation, scheme, agreement or understanding. 44 Section 96 of the Act. 45 Draft guidelines regarding implementation of General Anti-Avoidance Rules in terms of section 101 in the
Income-tax Act, 1961, GAAR committee report:
. 46 Draft Comprehensive Guide to the General Anti-Avoidance Rule issued by the SARS .

13

4.2 GAAR AND FOREIGN INSTITUTIONAL INVESTORS
The Committee constituted to reintroduce General Anti Avoidance has further been asked also
to examine the impact of the retrospective change in the Income Tax law on foreign
institutional investors and portfolio investors. Amendments by way of GAAR have been
proposed primarily targeting the much publicized case of Vodafone- Hutch deal.47

VODAFONE INTERNATIONAL HOLDING v. UNION OF INDIA ; ANR (2012) 6
SCC 613

This is a case concerning an ‘indirect transfer’ of shares wherein Vodafone B.V. had made a
100% acquisition of CGP Holdings from Hutchinson Telecommunications International Ltd.
(HTIL) and CGP Holdings controlled 67% of the stake in Hutchinson Essar Ltd. (HEL), which
was an Indian joint venture.48 In 2007, CGP investment based at Cayman Island was an
intermediary company of Hutchinson of Hong Kong. This CGP company’s investments had
67% shares of Hutch Essar India. Now when Vodafone bought CGP, they indirectly brought
and became owner of Hutch Essar as well. The tax department was of the view that this
transaction had the effect of indirect transfer of assets situated in India and thus tax liability
arises for Vodafone.49
In a battle that lasted five years, the fundamental issue before the Court was whether an offshore
transfer of shares between two foreign companies that resulted in indirect transfer of shares of
an Indian company could be taxed in India, given the fact that the foreign buyer (Vodafone
B.V.) had acquired economic control over the Indian shares.50
Bombay High Court ruled in favour of the Indian government but on further appeal by
Vodafone to the Supreme Court, the decision turned in favour of Vodafone. In its landmark
ruling, the Supreme Court ruled that profits arising out of such transfer of shares could not be
taxed in India since it did not result in the transfer of a capital asset situated India. Interpreting
Section 9(1) (i) of the Income Tax Act, 1961 (Act), the Court categorically held that the
provision was not a ‘look through’ provision and hence, did not encompass ‘indirect transfers’.
47 Bhola, supra note 5. 48 Anmol Awasthi & Neelasha Nemani, Entering Troy: The Government’s Battle between Tax Policy and
Investment Commitments, Indian Law Journal, (Aug. 28,2018, 06:14 PM),
49 UKessays, supra note 3. 50 Nemani, supra note 12.

14

Further, it was observed that in order to determine the true nature of a transaction, the tax
authorities must ordinarily take the ‘look at’ approach and should resort to the ‘substance over
form’ rule only when it is established that the transaction is a sham.51 It was also held that in
case of indirect transfers, the situs of the assets is located outside India and hence the
transaction was not taxable in India. During the course of delivering the verdict, the SC had
also made certain other observations, particularly that such transactions could only be brought
under the tax net through an express legislation. Further, the SC dismissed the Indian tax
authority’s jurisdiction over the offshore transaction and concluded that the Indian tax
authorities did not have any right to levy tax on the “offshore share sale”.52
In a haste to tax Vodafone, the Indian government amended Section 2(47) of the Act through
Section 353 of the Finance Act, 2012 with retrospective effect, thereby rendering the verdict
worthless and making Vodafone B.V. liable to pay tax. This harshness of the Indian
government was severely criticized by investors and tax experts from all across the globe.
Although the legislature through its amendment to the term ‘transfer’ sought to tax all indirect
transfers, it did not provide for the meaning or definition of what ‘indirect’ would encompass.
Disguised as ‘clarificatory’ and only to ‘remove doubts’, this amendment has not only
floundered the established principle of ‘certainty’ in the rule of law but has also given a severe
blow to foreign investment.54
At present, the Income Tax department has served a notice upon Vodafone B.V. in respect of
seizure of its assets upon non-payment of its tax liability which has now been doubled to
include penalty and interest as well. such a move on part of the tax authorities reflects the
complete disconnect between the policy makers and the implementers, thereby increasing the
51 N.S Nigam, Vodafone Amendment is More Than a Retrospective Issue, Business Standard, (Aug. 04, 2018,
07:57 PM), 52 Kamesh Susarla and Ramesh Ravisank, Beyond Vodafone- The Ripple Effect, Asia-Pacific Tax Bulletin,
2016 (Volume 22), No. 1, (May 6,2018, 12:28 PM)
. 53 s.3 Finance Act,2012- in clause (47), the Explanation shall be numbered as Explanation 1 thereof and after
Explanation 1 as so numbered, the following Explanation shall be inserted and shall be deemed to have been
inserted with effect from the 1st day of April, 1962, namely: –
‘Explanation 2.—For the removal of doubts, it is hereby clarified that “transfer” includes and shall be deemed to
have always included disposing of or parting with an asset or any interest therein, or creating any interest in
asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily,
by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such
transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a
share or shares of a company registered or incorporated outside India;’. 54 Editorial Staff, Why the Vodafone Retrospective Law Will Ruin India: Harish Salve, ITATonline, (Aug. 04,
2018, 08:12 PM), .

15

uncertainty surrounding the issue. The matter has thus been taken across the border and
Vodafone has decided to pursue the same in arbitration against the Indian government.55
4.3 VODAFONE JUDGEMENT- THE AFTERMATH
The government of India immediately filed a review petition against the SC judgment in the
Vodafone tax case, and termed the judgment as one that suffered from many errors apparent
on record and which failed to consider the case submitted by the Indian tax authorities. The SC
dismissed the petition filed by the Indian government as without merit and needing no
reconsideration.
The dismissal of the review petition signified the end of judicial options for the Indian
government on the Vodafone transaction and led to a slew of tax policy changes resulting in
retrospective amendments, domestic anti avoidance rules, new regulations to combat black
money and culminating in India’s active role in global tax policy reform.

55 Remya Nair, Vodafone Initiates Investment Arbitration against India, Live mint, (Aug. 04,2018, 08:27 PM),
.

16

CONCLUSION

GAAR undoubtedly is a significant step towards diminishing tax avoidance, but keeping in
view the thick and thin of its implementation the provisions of proposed GAAR can be assessed
with both, narrow and wide view. The wider view asserts that the existing provision will prove
to be sufficient in ensuring the reduction of tax avoidance arrangement only if applied and
interpreted with due discretion in order to meet the desired objective.
However, when assessed with a narrow perspective the provisions of GAAR show-case certain
loopholes. Some of these loopholes have been pointed out by the Committee set-up under the
Chairmanship of Director General of Income-tax as well as by the expert Committee. They
have suggested the corrective measures. These measures if incorporated will make GAAR even
more effective. The guidelines for GAAR should leave no room for any kind of ambiguity in
its implementation.
Underlying principle of these guidelines is to help tax authorities to curb the practice of tax
avoidance and hence achieve the broader objective of overall public welfare. Revenue from
taxes is the main source of finance for investment in projects for public improvement; therefore,
any attempt aimed at avoiding tax cannot be appreciated.
It is worth appreciating that the Indian Legislature has taken a step ahead to deal with the
growing number of instances of tax avoidance. Introducing such a provision in India will take
India to the league of other nations having similar provision. GAAR as a provision in itself
shall prove to be effective with the incorporation of suggestions and proper understanding of
the recommendations by the authorities.

17

BIBLIOGRAPHY

WEB BASED ARTICLES

1. Plucking the Geese: Traditional Ways of Raising Tax Do Not Work Well in a
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3. GAAR rising: Mapping tax enforcement’s evolution, Ernst & Young, February 2013,
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4. Introducing A General Anti-Avoidance Rule (Gaar), Tax Law IMF Technical Note,
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5. Sumit Singh Bagri & Uzma Naseem, GAAR – An Indian and International Perspective,
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8. Sameeksha Bhola, India: GAAR and new developments, mondaq connecting
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9. Direct Taxes Code, Discussion Paper 2009, by Department of Revenue, Ministry of
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18

10. Rahul Garg and Kaushik Mukherjee, Removing the fences, looking through
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11. Deepshikha Sikarwar, GAAR effect: Income Tax sleuths can use it to question pay
packages that help in reducing tax, The Economic Times, April 23, 2012 .
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13. RaghuvirSrinivasan, GAAR will bite anyway, The Hindu, July 1, 2012 .
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20. N.S Nigam, Vodafone Amendment is More Than a Retrospective Issue, Business
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19

21. Kamesh Susarla and Ramesh Ravisank, Beyond Vodafone- The Ripple Effect, Asia-
Pacific Tax Bulletin, 2016 (Volume 22), No. 1,
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23. Remya Nair, Vodafone Initiates Investment Arbitration against India, Live mint,
.

CASES

1. Commissioners of Inland Revenue v. His Grace the Duke of Westminster 1935
All E.R. 259.
2. Inland Revenue Commissioner v. Burmah Oil Co. Ltd, (1982) STC 30.
3. Vodafone International Holding v. Union of India & Anr (2012) 6 SCC 613.
4. W.T. Ramsay Ltd. v. IRC 1981 1 All E.R. 865.