Wednesday, February 4, 2015

GAAR and its Effects

The idea of GAAR became popular in the backdrop of Vodafone tax case.. GAAR is general anti avoidance rules made to prevent intentional tax avoidance by manipulating tax laws. It empowers the Income Tax dept. to investigate any deal or joint ventures which involves huge capital. however the announcement of GAAR created havoc in Capital market and is believed might lead to tax terrorism.. Main reasons were:
1. The arbitrary method to investigate any commercial deal.
2. Due to the possibility of retrospective taxation 
3. Vagueness of tax laws might be used against a particular company. eg recent Vodafone case of transfer pricing . Under GAAR they have much more power.
Impact on economy:
1. Less investment by foreign companies so less growth.
2. Reduced employment 
3. Poor service delivery as less competition .
Impact on ease of doing business:
1. GAAR will weaken the investors faith in stability of Indian tax regime.
2. Cost benefit analysis favors delay in implementation unless a properly detailed and acceptable norms are formed.
3. One big case like Vodafone may have ripple effect on investor's confidence.
As shome panel recommended we should delay it's implementation for now and should strive toward a stable and predictable tax regime,avoid retrospective taxation and work to provide a transparent business environment in Indian economy.

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