DMPQ- Explain why India introduced GAAR (General anti avoidance rules). Also mention the recommendations given by Parthasarathi Shome committee for GAAR.

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Tax Avoidance is an area of concern across the world.  The rules are framed in different  countries to minimize such avoidance of tax.  Such rules in simple terms are known as ‘General Anti  Avoidance Rules’ or GAAR. Thus, GAAR is a set of general rules enacted so as to check the tax avoidance.  It empowers the Revenue Authorities in a country to deny the tax benefits of transactions or  arrangements which do not have any commercial substance or consideration other than achieving the  tax benefit. GAAR is likely to put a curb on use of Tax Havens and Round Tripping. These rules are likely  to come into force in India in 2016.

However, it is considered to be too sweeping in nature and there was a fear (considering poor record of tax authorities in India) that Assessing Officers will apply these  provisions in a routine manner (or read misuse) and harass the general honest tax payer too.  So, it was  felt that there is a need for further legislative and administrative safeguards and at least a minimum  threshold limit for invoking GAAR should be introduced so that small time tax payers are not harassed.

As a result, an Expert Committee headed by Dr Parthasarathi Shome (to give recommendations on the  reforms in tax administration) was set up to suggest recommendations. Most of these recommendations  have been accepted – except the one regarding retrospective transaction – by the government, albeit  some with modifications. Committee has also asked for merging CBDT and CBEC to increase the  coordination between both the authorities and recommend for a governing council headed by a  chairman which was decided on the rotation basis from both authorities. To make the transactions  more transparent and increase the clarity , committee recommended for use of PAN as a common  business identification number to be used in all the government departments. Wealth tax should be  collected along with income tax is another recommendation to make the tax system more simple.

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