Union Budget 2012: GAAR empowers I-T department to deny tax benefits to 'companies'

MUMBAI: Companies attempting to avoid tax by carrying out transactions designed specifically for this purpose will find the going tough with the government empowering the income tax department to deny tax benefits to companies if the department is convinced that such transactions were aimed at dodging tax in India.

The General Anti-Avoidance Rules or GAAR which was announced in budget 2012 will enable the government to do this. For instance, if local firms form entities in Mauritius with the sole intention of claiming exemption from capital gains tax, Indian tax authorities have the right to deny their claim for exemption provided under the India-Mauritius tax treaty.

While an earlier order by the Supreme Court, in the case of liquor firm McDowell Ltd, empowers the department to pierce the veil of transactions designed to avoid tax, the income tax department is handicapped by an order of the Supreme Court in the case of Azadi Bachao Andolan. In this instance, the court has 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, imposes a further restraint on the revenue department from taking action against transactions suspected to have been devised for the purpose of avoiding tax.

The incorporation of GAAR in the Income-tax Act now provides more freedom to tax authorities to deal with transactions aimed clearing at avoiding paying tax.