GAAR to Override DTAAs: Can the Constitution or Limitation of Benefits Clauses Prevent this Menace?
Dhruva Gandhi & Gaurav Bhawnani*
Volume 10 Issue 2 (2017)
An amendment to the Income Tax Act, 1961 has introduced the General Anti-Avoidance Rules (‘GAAR’), which came into force from April 1, 2017. The GAAR seeks to clamp down on tax avoidance generally, including through Direct Taxation Avoidance Agreements (‘DTAA’). However, the application of the GAAR to treaties is likely to be arbitrary and to result in severe consequences. It is also likely to lead to harassment of assesses on account of a scrutiny of genuine transactions and lengthy procedural compliances. A constitutional challenge to the GAAR is likely on grounds that it overrides India’s international obligations. We analyse that under the constitutional scheme, treaty override is permissible, as Articles 253 and 246 are at the same pedestal, where a law made in pursuance of international obligations does not override other national laws. The validity of national laws is not affected by the presence of international obligations either. Breach of those obligations only gives rise to suitable remedies in international law. As a result, it is likely that such a challenge would fail, and GAAR would apply to DTAAs. Simultaneously, there has been another development that merits consideration; several of India’s new and re-negotiated DTAAs, including the India-Mauritius treaty, contain Limitation of Benefits clauses to prevent the use of these treaties as devices for tax avoidance. To prevent the harassment that would ensue from an application of GAAR to DTAAs, we argue that the GAAR should not apply to treaties having Limitation of Benefits clauses, as the latter can accomplish the same purpose without the accompanying uncertainty and harassment. This can be done by excluding these treaties from the scope of GAAR.