The right to plan tax affairs is a fundamental right of every taxpayer. However, there are times when tax planning results in tax avoidance. To prevent this, rules have been introduced, both globally as well as in India, to ensure that appropriate taxes are levied.
Though there were Specific Anti-Avoidance Rules (SAAR) in India through provisions in the Income-Tax Act, there were no codified General Anti-Avoidance Rules (GAAR) until they were introduced in the Finance Act, 2012, only to be deferred and then made applicable from April 1, 2017.
Under the GAAR provisions, the tax authorities have the powers to regard an arrangement as an impermissible avoidance one if its main purpose is to obtain a tax benefit by taking recourse to arm’s length pricing, or if it results in abuse of provisions of tax laws, lacks commercial substance, or is carried out in a manner not ordinarily employed for bona fide purposes. In such cases the tax authorities can re-characterise and determine the tax consequences.
The language of the statute and the element of subjectivity ingrained in it means that the tax authorities have wide powers, which unnerved both corporate India and foreign investors on the manner in which these powers would be exercised.
To address these concerns, the government deferred the implementation of GAAR several times and also introduced rules like grandfathering of investments made before April 1, 2017, from the applicability of GAAR, introducing the threshold of tax benefit of ~3 crore for applicability of GAAR etc to lend an element of certainty on the manner of implementation. Further, the government has come out with more clarifications on this.
The extant clarifications address some of the key issues that industry was seeking clarification on, but does leave some scope for clarity.
For example, grandfathering is provided for bonus/stock splits/conversion of compulsory convertible instruments on investments made before April 1, 2017, which is a positive. However, there is no express mention of shares acquired pursuant to amalgamations and demergers where the original shares were acquired before April, 1, 2017.
Further, it also grants relief for cases judged by high courts/National Company Law Tribunal where such courts have ‘adequately considered’ the tax implications while sanctioning such arrangements. This relief is still subjective and does not address specific situations like whether an amalgamation of a loss-making company with a profit-making company would be covered under this relief.
An effort has also been made to address the dispute in application between domestic GAAR and Limitation of Benefits (LoB) in tax treaties.
However, the clarification leaves the issue subjective by stating the relief would be applithe application of GAAR will be vetted first by the Commissioner of Income Tax (CIT) and at the second stage by an Approving Panel headed by a high court judge should hopefully ensure that only genuine cases of avoidance are picked up.
In conclusion, the present clarifications are agood starting point to address the concerns surrounding GAAR. One hopes the government accepts further representations from various stakeholders and comes out with more detailed guidelines before the implementation.
Under the GAAR provisions, the tax authorities have the powers to regard an arrangement as an impermissible avoidance one if its main purpose is to obtain a tax benefit by taking recourse to arm’s length pricing, or if it results in abuse of provisions of tax laws, lacks commercial substance, or is carried out in a manner not ordinarily employed for bona fide purposes. In such cases the tax authorities can re-characterise and determine the tax consequences.
The language of the statute and the element of subjectivity ingrained in it means that the tax authorities have wide powers, which unnerved both corporate India and foreign investors on the manner in which these powers would be exercised.
To address these concerns, the government deferred the implementation of GAAR several times and also introduced rules like grandfathering of investments made before April 1, 2017, from the applicability of GAAR, introducing the threshold of tax benefit of ~3 crore for applicability of GAAR etc to lend an element of certainty on the manner of implementation. Further, the government has come out with more clarifications on this.
The extant clarifications address some of the key issues that industry was seeking clarification on, but does leave some scope for clarity.
For example, grandfathering is provided for bonus/stock splits/conversion of compulsory convertible instruments on investments made before April 1, 2017, which is a positive. However, there is no express mention of shares acquired pursuant to amalgamations and demergers where the original shares were acquired before April, 1, 2017.
Further, it also grants relief for cases judged by high courts/National Company Law Tribunal where such courts have ‘adequately considered’ the tax implications while sanctioning such arrangements. This relief is still subjective and does not address specific situations like whether an amalgamation of a loss-making company with a profit-making company would be covered under this relief.
An effort has also been made to address the dispute in application between domestic GAAR and Limitation of Benefits (LoB) in tax treaties.
However, the clarification leaves the issue subjective by stating the relief would be applithe application of GAAR will be vetted first by the Commissioner of Income Tax (CIT) and at the second stage by an Approving Panel headed by a high court judge should hopefully ensure that only genuine cases of avoidance are picked up.
In conclusion, the present clarifications are agood starting point to address the concerns surrounding GAAR. One hopes the government accepts further representations from various stakeholders and comes out with more detailed guidelines before the implementation.
Business Standard New Delhi,30th January 2017
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