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Rajendra Nayak |
Aastha Jain |
A General Anti-avoidance Rule (GAAR) was recently introduced in the Indian Tax Law (ITL) with effect from April 1 2013. It is a broad rule empowering the Tax Authority to invalidate an arrangement, including disregarding application of tax treaties, if an arrangement is treated as an "impermissible avoidance arrangement" (IAA). The GAAR provisions are to be applied in accordance with rules and guidelines to be issued by the government. In this regard, a committee was set up by the country's tax administrative body to give its recommendations on formulating the guidelines for implementation of GAAR. The key recommendations of the committee are:
Confirmation of legal position that onus of establishing that an IAA exists, is on the Tax Authority;
Prescribe a monetary threshold so as to provide relief to small taxpayers and avoid indiscriminate application of GAAR;
Clarify that GAAR would apply only on income accruing or arising to taxpayers on or after April 1 2013, so as not to have retroactive operation;
Tax consequences of an IAA should be restricted only to that part of the arrangement which is impermissible and not to the entire arrangement;
GAAR may not apply to Foreign Institutional Investors (FIIs) or to nonresident investors of FIIs, where they opt for taxation under ITL, and not under a tax treaty;
Under normal circumstances, where a specific anti-avoidance rule is applicable, GAAR would not be invoked;
Time limits need to be prescribed for making a reference to the Approving Panel by the Tax Authority (60 days), and also at the first instance, for taking action by the Tax Authority (six months); and
A draft format on procedure to be followed by the Tax Authority when invoking GAAR, has been provided, to provide consistency of approach, transparency and adherence to principles of natural justice.
The committee has also explained that GAAR is a codification of substance over form rule and the guidelines are meant to provide explanation and clarity on the GAAR provisions of the ITL. Further, in interpreting GAAR, a distinction needs to be made between tax mitigation and tax avoidance. Tax mitigation is where the taxpayer takes advantage of fiscal incentives accorded by tax legislation, and GAAR would not apply in such cases. To explain terms like misuse or abuse, bona fide purpose, lacks commercial substance, the committee has provided 21 illustrations of various structures, and their interpretation on applicability of GAAR on them. A number of examples deal with treaty shopping and abuse of tax treaty situations.
Pursuant to the release of the draft guidelines, the Prime Minister has approved constitution of an Expert Committee on GAAR, to submit the final guidelines to the government by September 30 2012. The committee is mandated with the responsibility of collaborating with stakeholders to bring in transparency in the consultation process.
Rajendra Nayak (rajendra.nayak@in.ey.com) & Aastha Jain (aastha.jain@in.ey.com)
Ernst & Young
Tel: +91 80 4027 5275
Website : www.ey.com/india
