Clarifications on implementation of GAAR provisions under the Income Tax Act, 1961
The General Anti Avoidance Rule (GAAR) provisions shall be effective from the Assessment Year 2018-19 onwards, i.e. Financial Year 2017-18 onwards. The necessary procedures for application of GAAR and conditions under which it shall not apply, have been enumerated in Rules 10U to 10UC of the Income-tax Rules, 1962.The provisions of General Anti Avoidance Rule (GAAR) are contained in Chapter X-A of the Income Tax Act, 1961.
- GAAR will override tax treaty provisions and tax officials are allowed to deny tax benefits if a deal is found without any commercial purpose other than tax avoidance.
- GAAR examines cases of aggressive tax planning involving inbound and outbound transactions, acting as a deterrent to treaty shopping.
- The provisions of GAAR will be applicable to any tax benefit obtained from an arrangement on or after April 1.
Recent clarifications issued
- It has been clarified that if the jurisdiction of FPI (Foreign Portfolio Investments) is finalized based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, GAAR will not apply.
- GAAR will not interplay with the right of the taxpayer to select or choose method of implementing a transaction.
- It has also been clarified that adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies and the same are required to be tackled through domestic anti-avoidance rules. However, if a case of avoidance is sufficiently addressed by Limitation of Benefits (LoB) provisions in the tax treaty, there shall not be an occasion to invoke GAAR.
- It has been clarified that if at the time of sanctioning an arrangement, the Court has explicitly and adequately considered the tax implications, GAAR will not apply to such an arrangement.
- The proposal to apply GAAR will be vetted first by the Principal Commissioner of Income Tax /Commissioner of Income Tax and at the second stage by an Approving Panel headed by a judge of High Court.
- The stakeholders have been assured that adequate procedural safeguards are in place to ensure that GAAR is invoked in a uniform, fair and rational manner.
About ‘Limitation of Benefits (LoB)’ clause
- It is an anti-abuse provision that restricts eligibility criteria for a third country (other than the contracting states) residents to obtain benefits under a Double Taxation Avoidance Agreement.
- India has been insisting upon a LoB clause with all the concerned nations. The introduction of LoB provisions in recent Indian treaties, as in India’s treaty with Singapore and Mauritius recently, demonstrates a policy to discourage treaty shopping – where a multinational business takes advantage of favourable tax treaties in certain jurisdictions.