GAAR v. TAAR: India and UK Experience

Traditionally, tax avoidance was tackled through Targeted Anti-Avoidance Rules or TAARs. TAARs are precise and narrowly focused, much like a sniper targeting a specific objective. They are designed to close identifiable loopholes in tax laws being exploited to avoid taxes. Each TAAR focuses on particular avoidance schemes and is legally clear, ensuring predictability.¹ They have proven highly effective in addressing established tax avoidance strategies as is clear from BlackRock HoldCo 5, LLC v. HMRC², Kwik-Fit v. HMRC³ in the United Kingdom (UK) and Vikram Krishna v. CIT⁴ and Gopal and Sons (HUF) v. CIT⁵ in India.

However, the specificity of TAARs limits their effectiveness against new and evolving tax avoidance schemes, as it is impractical to preemptively define every potential transaction. TAARs may not address schemes predating their enactment or those exploiting loopholes within the TAAR itself.⁶ Also, their scope for corrective action is limited, as TAARs often lack the authority to reclassify, recharacterise, or disregard transactions to counteract avoidance effectively.⁷

This creates a cycle where taxpayers devise new strategies, prompting governments to introduce more TAARs, complicating the tax framework. In the UK, there are over 300 TAARs, including those in the UK Corporation Tax Act, 2009⁸, and the UK Taxation of Chargeable Gains Act, 1992⁹.¹⁰ India faces similar complexities, with numerous TAARs under the Income Tax Act, 1961¹¹ including Section 2(22)(e)¹², which addresses disguised profit distributions as loans; Section 43¹³, targeting manipulative transactions involving depreciable assets; and Sections 50-C¹⁴ and 50-CA¹⁵, which ensure that capital gains on property and securities transfers reflect fair market value.

Due to the abovementioned challenges, many countries including India and the UK have drifted into adopting the General Anti-Avoidance Rules or the GAAR, which are more akin to a shotgun approach, with broad, overarching provisions to tackle a wide range of tax avoidance arrangements. Despite this, TAARs remain in use, as GAARs are resource-intensive and often employed only as a last resort. This coexistence raises issues regarding conflict resolution and prioritisation between TAARs and GAARs, which can be seen in both India and in the UK.

UK

The UK experience illustrates the risks of unclear guidance on applying GAAR versus TAAR. His Majesty’s Revenue and Customs (HMRC) for instance has invoked GAAR in three cases involving gold bullion payments to employees to avoid tax¹⁶, despite the UK Supreme Court’s ruling in RFC 2012 Plc (In Liquidation) (Formerly the Rangers Football Club Plc) v. Advocate General for Scotland¹⁷ that such payments should be treated as earnings under Section 62 of the Income Tax (Earnings and Pensions) Act, 2003 (Itepa)¹⁸. Ordinary tax laws could have addressed these cases, making GAAR unnecessary.

This is troubling, as invoking GAAR in the UK triggers a severe 60% special penalty¹⁹ and accelerated payment notices (APNs)²⁰. The APNs are used to expedite tax collection in tax avoidance cases, potentially imposing an unfair burden on taxpayers. Even with pending appeals, taxpayers must pay the full disputed amount in such cases.

The indiscriminate use of GAAR has been widely criticised. For instance, in Wired Orthodontics²¹, where GAAR was discussed for the first time in the UK. The Court ruled that GAAR was unnecessary for the relevant fact situations because the schemes could be addressed adequately through general tax laws. UK courts have cautioned against overreliance on GAAR. The courts instead encourage the HMRC, His Majesty’s Revenue and Customs to apply TAAR wherever it applies and GAAR should be used sparingly as a last resort.

India

On the other hand, the High Court decision this year²² held that GAAR takes precedence over TAARs due to the non obstante clause in Section 95(1) of the Income Tax Act, 1961²³. This clause explicitly states that GAAR applies despite any conflicting provisions in the Act when an impermissible avoidance arrangement is identified. Moreover, Section 100²⁴ of the same chapter underscores that GAAR can be applied either in addition to, or as a replacement for, any existing tax determination methods, including TAAR.

However, in this case, GAAR was applied neither in place of nor in addition to TAAR. The Court held that no TAAR covered the facts of the case. The closest TAAR was Section 94(8) of the Income Tax Act, 1961²⁵ but it did not apply to the taxpayer’s situation. Since no TAAR was applicable, the Court proceeded to apply GAAR. It found the arrangement lacked commercial substance and satisfied both the tainted elements test and the main purpose test. Thus, the ratio of the case is that if no TAAR applies, GAAR can still be invoked for a given fact situation. The ruling is not a blanket endorsement of GAAR’s dominance over TAAR.

The case does not address what happens when both GAAR and TAAR apply to a situation. It would likely be left to the tax authorities to decide, and they may favour TAAR in India, as it avoids GAAR’s cumbersome procedures, such as multiple permissions, monetary thresholds, and a GAAR panel.

Notably, there is nothing in the Income Tax Act, 1961 that prevents applying TAAR over GAAR. While the GAAR’s non obstante clause seems to grant GAAR overriding effect, it does not apply indiscriminately.²⁶ When the statute’s language is clear, the non obstante clause cannot narrow its interpretation. Instead, it applies only to genuinely conflicting provisions.²⁷ Therefore, only in case of conflicts between GAAR and TAAR, GAAR takes precedence, but not automatically or in every case. If no conflict is there, TAAR may still be given precedence.

Separately, some of the court’s arguments deserve closer examination. The Court claimed that GAAR should take precedence over TAAR because it was enacted later.²⁸ This is based on the maxim lex posterior derogat legi priori, which holds that a later law takes precedence over an earlier one.²⁹ However, this reasoning is flawed when applied to the context at hand. The mere chronological order of enactment should not be the deciding factor in determining the precedence here. For example, newly introduced TAARs should not be treated differently from pre-existing ones solely based on their date of enactment, nor should they automatically be considered subordinate to GAAR.

The Court’s conclusion also appears to misinterpret precedents like R.S. Raghunath v. State of Karnataka³⁰, Union of India v. Shiv Dayal Soin & Sons (P) Ltd.³¹ and CTO v. Binani Cements Ltd.³², which centered on the principle of lex specialis derogat legi generali, meaning that specific law overrides general law. In the present case, the proper interpretation should have recognised that while both TAAR and GAAR have their distinct domains, GAAR prevails in cases of conflict due to its non obstante clause. This is based on the understanding that GAAR should not be seen as a general law and is actually drafted in a manner to give it a very special status in the Indian statute.

In my view, the GAAR framework has been misunderstood, largely due to its nomenclature “General” Anti-Avoidance Rules in India and “General” Anti-Abuse Rules in the UK. These should not be perceived as general laws meant for indiscriminate use. Instead, GAARs are broadly framed to target only the most egregious forms of tax avoidance and should be applied selectively and sparingly. Harish Salve for instance warned not to implement GAAR like a fisherman’s net to catch whatever you can.³³

GAARs unpredictable nature can create uncertainty, reinforcing the need for it to be used as a provision of last resort, while still having the authority to override other tax laws in case of conflict.³⁴ This has been reiterated in both the United Nations (UN) Practical Portfolio³⁵, the International Monetary Fund (IMF) technical note³⁶ and the Inter-American Center of Tax Administrations (Iacta)³⁷. In jurisdictions like Australia, GAAR is a provision of last resort.³⁸

Similarly, in R. v. Canada Trustco Mortgage Co.³⁹, the Canadian Supreme Court affirmed GAAR’s role as a last resort. New Zealand courts have adopted a “tandem approach”, harmonising TAARs with GAAR. Under this approach, while both are significant and are given effect to, GAAR takes precedence in cases where the taxpayer has taken advantage of a loophole in the TAARs itself. In such cases the GAAR applies. This balance ensures that GAAR effectively addresses avoidance without undermining TAAR.⁴⁰ This interpretation also aligns with the Central Board of Direct Taxes (CBDT) Circular of India.⁴¹

TAAR and GAAR should be harmonised to ensure both are applied effectively. The rule of harmonious construction dictates that all laws be given full effect. In Ben Nevis Forestry Ventures Ltd. v. IRC⁴², it was held that TAAR and GAAR should be enforced comprehensively. In my view, TAAR should generally take precedence and be applied first, ensuring it is not rendered redundant. However, if an arrangement exploits TAAR loopholes and satisfies GAAR conditions, GAAR should be applied. The tax authorities should prioritise TAAR and only invoke GAAR when TAAR fails to address tax avoidance. This principle is supported by CBDT Circular and may be further clarified by statute.