India: Rules for application of general-anti avoidance rules

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India: Rules for application of general-anti avoidance rules

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Rajendra Nayak


Aastha Jain

A General anti-avoidance rule (GAAR) was introduced in the Indian Tax Law (ITL) in 2012 as a broad-based rule giving wide discretionary powers to Indian revenue authorities to invalidate an arrangement, including disregarding application of tax treaties, if an arrangement is treated as an "impermissible avoidance arrangement". GAAR would come in effect from tax year 2015-16. The Central Board of Direct Taxes, the apex administrative authority of direct taxes in India, has recently issued a notification prescribing rules for the application of GAAR. The rules clarify that GAAR would apply to all tax benefits obtained after April 1 2015. However, it also provides certain exemptions where GAAR would not apply which are as below:

  • An arrangement where the aggregate tax benefit of all the parties to the arrangement in the relevant tax year does not exceed INR30 million ($487,770).

  • A foreign institutional investor (FII) who has not taken any benefit under a tax treaty entered into by India with another country or a specified territory and has invested in listed or unlisted securities with prior permission of the competent authority in accordance with Indian regulatory laws.

  • A non-resident investor who has invested in an FII directly or indirectly by way of an offshore derivative instrument or otherwise.

  • Any income derived from transfer of an investment made before August 30 2010 (the date of introduction of the Direct Tax Code Bill 2010) by such person.

The rules also state that where a part of an arrangement is declared as impermissible, GAAR provisions would apply only in relation to such part and not to the entire arrangement. Further, procedure for invoking GAAR by the Indian revenue authorities is laid out which includes a window for taxpayers to raise objections against invocation of GAAR at different levels during the proceedings. Other aspects like mode, form, manner and time limit for the various steps involved in the procedure are prescribed.

Introduction of GAAR had raised significant apprehensions with the stakeholders/investors followed by representations and expert committee recommendations on various aspects of GAAR. In view of the above, certain amendments were recently carried out in GAAR under the ITL. In the same spirit, the rules appear to address concerns of taxpayers to a large extent and provide clarity on the procedural aspects for application of GAAR. The rules will be effective from tax year 2015-16.

Rajendra Nayak (rajendra.nayak@in.ey.com) and Aastha Jain (aastha.jain@in.ey.com)

EY

Tel: +91 80 4027 5275

Website: www.ey.com/india

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