Draft General Anti-avoidance Rules (˜GAAR™) guidelines were made public yesterday late evening. A quick snapshot of some of the salient features is given here-in-below:
a) Monetary threshold
Only an arrangement or arrangements where the tax benefit through the arrangement(s) in a year to a taxpayer is above a minimum threshold will be covered by GAAR provisions.
b) Prescription of statutory forms
To ensure consistency of approach in the procedures for invoking the GAAR provisions and to ensure that principles of natural justice are not violated, statutory forms have been prescribed which the Assessing Officer, Commissioner has to fill in for making reference to the Commissioner/ Approving Panel
c) Prescribing the time limits
60 day time-frame proposed for Commissioner to make a reference to the Approving Panel/ communicate to the Assessing Officer from the date of the receipt of the objection from the taxpayer. No action u/s 144BA(4) or (5) to be taken by the Commissioner after the period of six months from the end of the month in which the reference under sub-section 144BA(1) is received.
d) Approving Panel
The Approving Panel proposed to comprise of three members, out of which, two members should be of the level of Chief Commissioners of Income Tax and the third member should be an officer of the level of Joint Secretary or above from the Ministry of Law. All the members should be full time members.
e) Safe Harbour for Foreign Institutional Investors (FII™s)
Where an FII chooses not to take any benefit under an agreement entered into by India under section 90 or 90A of the Act and subjects itself to tax in accordance with the domestic law provisions, then, the GAAR provisions would not apply to such FII or to the non-resident investors of the FII.
Where an FII chooses to take a treaty benefit, GAAR provisions may be invoked in the case of the FII, but would not in any case be invoked in the case of the non-resident investors of the FII.
f) Prospective operations of the GAAR provisions
The provisions of GAAR will apply to the income accruing or arising to the taxpayers on or after April 01, 2013.
g) Inter-play of GAAR and Specific Anti-avoidance Rules (˜SAAR™)
Under normal circumstances, where SAARs viz. Transfer Pricing regulations are applicable, GAAR will not be invoked. However, in an exceptional case of abusive behaviour on the part of a taxpayer that might defeat a SAAR, GAAR could also be invoked.
h) GAAR applicability where only a part of the arrangement is impermissible
Where only a part of the arrangement is impermissible, the tax consequences of Impermissible Avoidance Arrangement will be limited to only that part of the arrangement.
i) Illustrative cases under GAAR
Terms like, Misuse or abuse, bona fide purpose and lacks commercial substance explained by way of 21 indicative illustrations. The guidelines provided through examples are based on specific facts and whether GAAR may be invoked would depend on the specific facts of that case. A perusal of the illustrations suggests that structuring of inbound investments into India by way of taking advantage of favourable tax jurisdictions is being specifically targeted and covered under GAAR. It is accordingly imperative that such arrangements are reviewed.
Other Guidelines
- GAAR is a codification of the proposition that while interpreting the tax legislation, substance should be preferred over the legal form.
- GAAR deals with cases of tax avoidance since tax evasion which is clearly distinct from tax avoidance, is already prohibited under the current provisions of the Income-tax Act.
- The GAAR provisions also do not deal with cases of tax mitigation, a situation where the taxpayer takes advantage of a fiscal incentive afforded to him by the tax legislation by actually submitting to the conditions and economic consequences that the particular tax legislation entails viz. SEZ scheme.
- The onus of proving that there is an impermissible avoidance arrangement is on the Revenue.
We will be pleased to clarify any aspects in relation to the above.
Best regards,
Alok Vasant
Acupro Consulting Private Limited
Gupta Plaza, 2nd Floor, E-513, Ramphal Crossing
Sector 7, Dwarka, New Delhi 110 077
