Budget 2012: General Anti-Avoidance Rules introduced; Income-tax department to have greater powers

MUMBAI: As expected, General Anti-Avoidance Rules ( GAAR) are introduced in the current budget. The implication of this is that the Income-tax department will have powers to deny tax benefit if a transaction was carried out exclusively for the purpose of avoiding tax.

For example, if an entity is set up in Mauritius with the sole intention of claiming exempiton from capital gains tax, the tax authorities have the right to deny the claim for exemption provided under the India-Mauritius tax treaty.

Budget at ET: Budget 2012 | Union Budget | Live Union Budget Blog | Railway Budget 2012 | Budget News | Economic Survey 2012

While an earlier order by the Supreme Court, in the case of McDowell Ltd, empowers the department to look through sham transactions devised for avoiding tax, the tax department at present is restrained by the apex court’s own order in the case of Azadi Bachao Andolan in which it held that a certificate of residence from Mauritius authorities is sufficient proof for the taxpayer to claim capital gains tax exemption provided under the India-Mauritius tax treaty.

Again, a very liberal view on such transactions taken by the Supreme Court in its recent order in the Vodafone tax case, put further restraint on the tax department from taking action against transactions suspected to have been devised for the purpose of avoiding tax.

Incorporation of GAAR in the Income-tax Act now provides more freedom to the tax authorities to deal with sham transactions.