General Anti-Avoidance Rule (GAAR)

In the year 2007, Vodafone entered the Indian telecom market by buying Hutchinson Essar. This deal was signed in Cayman Islands, a tax haven, and the Indian tax authorities claimed a loss of $2Billion to the exchequer. Similarly, in the past tax authorities have scrutinized and reported numerous instanceswhere individuals or corporates have flaunted loopholes in tax rules to avoid being taxed. In many such instances, tax havens such as Mauritius, Cayman IslandsandSingapore, where tax liability is very limited, have been used to re-route unaccountable money back into Indian economy and present it as legal money. Readers will be amazed to know that 80% of foreign investments, flowing into Indian equities, come from only two destinations, namely Singapore and Mauritius.

Looking at the large-scale revenue losses being incurred due to misuse of avoidance opportunities by corporates, the government deemed it necessary to come up with tax avoidance rules and introduced General Anti-Avoidance rule(GAAR) under Section 101 of Income Tax Actduring the budget session on 16th March 2012 by then UPA government’s finance minister Shri Pranab Mukherjee. The present-day government, under finance minister Shri ArunJaitely, has declared its intentions to act tough on tax avoidance and implement GAAR effectively. This is following the recent decision to demonetize large value currency and commissioning the Prohibition ofBenaamiPropertyTransaction Act. 

 GAARisa tax proposal by the Central Board of Direct Taxes (CBDT), which will come into existence on 1st April 2017 and will be effective from assessment year 2018-2019. It empowers tax administration to check any transaction or complex arrangement aimed at avoiding tax and subsequently bring it within the ambit of tax laws.

The main features proposed under GAAR are:

• will be applicable if the tax benefit is above Rs. 3 crores.
• will not to be invoked against Foreign Institutional Investors (FII) if they meet certain pre-defined criteria.
• tax shall be determined only for that part of the arrangement that has been declared to be an impermissible avoidance arrangementunder section 96.
• Transfer of investments made before 01stApril 2017, would be grandfathered under rule 10U(1)(d) from GAAR (as per CBDT’s GAAR notification dated 27-Jan-2017 vide circular No.7/2017: Clarifications on Implementation of GAAR).  

For invoking the provisions of GAAR on a transaction or an arrangement that has been deemed impermissible avoidance after a thorough scrutiny by the Income Tax (IT) department, a lengthy process is followed, which involves various tax-administration institutions. Here are the various steps followed while invoking GAAR:

1. The Commissioner of Income tax, after receiving the reference of the case from an Assessment Officer (AO),issues a notice to the tax payerstating that a given tax arrangement or transaction is an impermissible avoidance arrangement.
2. The tax payer reviews the order and if it disagrees, can challenge it stating that it is a permissible arrangement and there is no tax liability.
3. The Commissioner of Income tax reviews the challenge and if disagree, refers the case to the Approving Panel, headed by a High Court judge
4. The Approving Panel reviews the case and if it declares it as an impermissible arrangement, directs the AO to issue an order to the tax payer.
5. The tax payer complies accordingly.

However, there is nothing to panic as the tax department has categorically stated that all measures are being taken to ensure that GAAR is adopted in a uniform, fair and rational manner. The GAAR will not be invoked or applied if:

• the jurisdiction of a foreign portfolio investor is finalized based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit. This serves as a big relief for all the foreign investors who use derivative instrument called Participatory or P-notes to invest in Indian stock market.
• a case of avoidance is satisfactorily addressed by Limitation of Benefits (LoB) provisions in the tax treaty.
• at the time of sanctioning an arrangement, the Court has explicitly and adequately considered the tax implications.
• the arrangement is held permissible by Authority of Advance Ruling as it is binding on PCIT/CIT and IT authorities subordinate to him in respect of the applicant. (source: https://www.incometaxindia.gov.in)

As a tax expert and an economist, I would like to highlight that anti-avoidance regulation is tough to implement since the line of demarcation between different types of avoidance practices is very thin and difficult to differentiate. But, I would say that it’s a very thoughtful move by the government to finally roll out GAAR which was pending for many years. Once implemented, there will definitely be teething problems but it will settle down and help the government to accomplish its mission of putting a stop to dubious transactions and arrangements and make them accountable towards nation building.

CA Sunil Kumar Gupta

Business Expert, Economist, Author & Philanthropist

www.sunilkumargupta.com