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Which of the statements given below is/are correct? 1. In India, the provisions of General Anti-Avoidance Rule (GAAR) will be implemented with effect from 1 April 2015. 2. The provisions of GAAR were aimed at checking tax avoidance by overseas investors. Select the correct answer using the code given below:

Which of the statements given below is/are correct? 1. In India, the provisions of General Anti-Avoidance Rule (GAAR) will be implemented with effect from 1 April 2015. 2. The provisions of GAAR were aimed at checking tax avoidance by overseas investors. Select the correct answer using the code given below: Correct Answer 2 only

The correct answer is 2 only.

Important Points

  •  General Anti-Avoidance Rule
    • ​General Anti Avoidance rule (GAAR) is a set of rules or a framework which helps the revenue authorities decides whether a particular transaction has commercial substance or not. If it does not have commercial substance and is not a genuine transaction then what should be the tax liability associated with it.
    • The General Anti-Avoidance Rules (GAAR) are designed to prevent the avoidance of tax by taking advantage of international tax laws.
    • Originally, the rules were supposed to be implemented from April 1, 2014 onwards, but finally it came into effect on 1st April 2017. Hence, statement 1 is incorrect.
    • It is framed by the Department of Revenue under the Ministry of Finance.
    • Originally proposed in the Direct taxes code 2009, are targeted at arrangement or transactions made specifically to avoid taxes.
    • It was considered controversial because it had provisions to seek taxes from past overseas deals involving local assets retrospectively.
    • It allows tax officials to target participatory notes.
    • Under GAAR, the investor has to prove that the participatory note was not set to avoid taxes. Hence, statement 2 is correct.
    • It also allows officials to deny double taxation avoidance benefits, if deals made in tax havens like Mauritius were found to be avoiding taxes. 

​​Additional Information

  • The GAAR was introduced in India after the Vodafone deal with Hutchison-Essar. This deal took place in the Cayman Islands.
  • As per the government, above USD 2 billion was lost in taxes.
  • In the subsequent case, the Supreme Court ruled in favour of Vodafone.

Related Questions

General Anti-Avoidance Rule (GAAR) under which tax is imposed on the foreign investment with the objective of tax avoidance has been made by which ministry?
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II. The national air carrier has increased its flights to overseas destinations.
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