Panel to hear taxpayer before  invoking GAAR under new set of rules

The Central Board of Direct Taxes (CBDT) has laid down fresh rules to classify certain corporate transactions as tax avoidance schemes under the General Anti-Avoidance Rules (GAAR), which had come into force in April 2017.

The Income Tax (8th Amendment) Rules, 2019, notified on September 17, specify how tax officials should refer a suspected case of tax avoidance to a panel of senior officials and what should be the role of the panel.

The new rules say that the group of senior officials must first hear out the principal commissioner, who referred the case, as well as the taxpayer concerned, before taking a decision. The presentation by both parties before the panel will be key in ensuring principles of natural justice are followed, and strengthen the case, if the panel concludes that a transaction was meant to avoid paying taxes.

The original provisions of GAAR included in the Income Tax Act were framed after intense debate, as India sought to tackle the corporate practice of avoiding taxes through transactions that may not be illegal, but may be undesirable or inequitable by undermining the collection of taxes.

Tax authorities worldwide have been combating tax avoidance by corporations intensely in recent years. Whenever a transaction is considered to be an impermissible arrangement, officials can re-characterize it for tax purposes. In contrast, tax evasion involves underreporting of income or suppressing facts to evade taxes. The law, however, does not prevent legitimate tax planning or tax mitigation by making use of tax incentives subject to conditions. “As per the new rule, the approving panel shall be required to give an opportunity of being heard to the assessing officer as well as the assessee. Formalizing a procedure gives a law the required transparency," said Rakesh Nangia, managing partner, Nangia Advisors (Andersen Global).