'GAAR' and 'Rule of Law': Mutually Incompatible?

Pursued on the avowed premise that ‘tax avoidance, like tax evasion, seriously undermines the achievements of the public finance objective of collecting revenues in an efficient, equitable and effective manner’, the intent underlying the General Anti-Avoidance Rules of GAAR has found unequivocal resonance with the Government of India and its publicly stated desire to position GAAR as a pivotal ingredient of the direct tax laws of the country. While the Indian judiciary remains unfazed with the heated debate on ‘substance versus form’ or ‘doctrine of commercial substance’ and continues to pursue the Duke of Westminster principle, the Indian Parliament has chosen to adopt a head-on stand and has legislated GAAR in the Indian income tax law. Even though the implementation of GAAR has been deferred for the time being, like the Damocles sword, the GAAR provisions continue to occupy an overarching position in the law and sooner or later will come to haunt the subjects of these tax laws. In the wake of these developments this paper makes an attempt to examine the judicial acceptability of GAAR in the event the overriding powers vested with the tax-administration in terms of these rules is subjected to challenge before the country. The principle hypothesis of this paper is to examine, upon an appraisal of the statutory provisions as existing in the income tax law of India (amended as lately as in 2013), whether GAAR would run foul of the ‘rule of law’ which has been declared as an inviolable tenet of the constitutional ethos permeating the Indian legal system. The paper is dividend into ten parts. The first part is the introduction and sets out the relevant considerations to put the appraisal exercise in context. The second part revisits the attributes of the legal system perceived as restraint by the tax-administration to appraise the factors pressing the need for GAAR. The third part examines the factors surrounding the first unveiling of GAAR in the Indian context to note the facets of the GAAR introduced as a part of the draft Direct Tax Code Bill in 2009 culminating in the Direct Tax Code Bill 2010. The fourth part examines threadbare the statutory provisions relating to GAAR as introduced (with corresponding amendments) in the Income Tax Act, 1961. The fifth and sixth parts revisit the foundational elements of the ‘rule of law’ regime generally and in the Indian legal system specifically in their respective content. The seventh part examines the relevant ‘rule of law’ considerations appropriate for testing the permissibility of action in terms of GAAR. In the eight and ninth part this paper examines, albeit briefly, the legal position relating to GAAR in Canada and New Zealand respectively to cull out their experience with GAAR of these similarly placed commonwealth jurisdictions. Based on a holistic appraisal of these factors the tenth and the last part to draw the conclusions thereon.

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