GAAR : A Revenue's response to aggressive tax planning

THE much-talked GAAR is finally here. The proposal to introduce General Anti Avoidance Rules (GAAR) with effect from 1st April 2013 (applicable for Assessment Year 2013-14 and subsequent years), which was proposed to be introduced when the Direct Tax Code (DTC) bill was passed, would add additional burden and to the woes of the corporate world. Only a few days before, the Parliamentary Standing Committee on DTC has recommended some major changes in the provisions of GAAR in DTC. It seems these recommendations have not at all been considered by the Finance Minister. The introduction of GAAR is expected to impact the foreign investment in India.

Concept of GAAR

GAAR is an anti-avoidance measure for the Revenue authorities to identify the aggressive tax planning in any transaction undertaken by the tax payers. The provision of GAAR will give wide powers to the Income Tax Authorities to determine the tax consequences for any arrangement that has been structured so as to avoid the payment of tax (impermissible avoidance arrangements). GAAR provides ample powers to the Revenue authorities to disregard such transaction with the motive of tax avoidance, thereby re-characterizing and assessing the income accruing on those transaction. By invoking the provisions of GAAR, the Revenue authorities can also deny the benefits available under the Tax Treaties.

As per the provision introduced in the Act, ‘impermissible avoidance arrangements’ means any arrangement whose main purpose or one of the main purposes is to obtain a tax benefit and which also satisfies at least one of the following four tests -

(a) The arrangement creates rights and obligations, which are not normally created between parties dealing at arm’s length.

(b) It results in misuse or abuse of provisions of tax laws.

(c) It lacks commercial substance or is deemed to lack commercial substance : An arrangement will be deemed to lack commercial substance if –

· the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or
· it involves or includes -

(i) round trip financing;
(ii) an accommodating party ;
(iii) elements that have effect of offsetting or cancelling each other; or
(iv) a transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of fund which is subject matter of such transaction; or

· it involves the location of an asset or of a transaction or of the place of residence of any party which would not have been so located for any substantial commercial purpose other than obtaining tax benefit for a party.

However, certain circumstances like period of existence of arrangement, taxes arising from arrangement, exit route, shall not be taken into account while determining ‘lack of commercial substance’ test for an arrangement.

(d) Is carried out in a manner, which is normally not employed for bonafide purpose.

Once the arrangement is held to be an impermissible avoidance arrangement then the consequences of the arrangement in relation to tax or benefit under a tax treaty can be determined by keeping in view the circumstances of the case, however, some of the illustrative steps are:-

(a) disregarding or combining any step of the arrangement.
(b) ignoring the arrangement for the purpose of taxation law.
(c) disregarding or combining any party to the arrangement.
(d) reallocating expenses and income between the parties to the arrangement.
(e) relocating place of residence of a party, or location of a transaction or situs of an asset to a place other than provided in the arrangement.
(f) considering or looking through the arrangement by disregarding any corporate structure.
(g) re-characterizing equity into debt, capital into revenue etc.
Procedure for invoking GAAR

a. It is proposed that the Assessing Officer shall make a reference to the Commissioner for invoking GAAR and on receipt of reference the Commissioner shall hear the taxpayer and if he is not satisfied by the reply of taxpayer and is of the opinion that GAAR provisions are to be invoked, he shall refer the matter to an Approving Panel. In case the assessee does not object or reply, the Commissioner shall make determination as to whether the arrangement is an impermissible avoidance arrangement or not.

b. The Approving Panel has to dispose of the reference within a period of six months from the end of the month in which the reference was received from the Commissioner

c. The Approving Panel shall either declare an arrangement to be impermissible or declare it not to be so after examining material and getting further inquiry to be made.

d. The Assessing Officer will determine the consequences of such a positive declaration of arrangement as impermissible avoidance arrangement.

e. The final order in case any consequence of GAAR is determined shall be passed by AO only after approval by Commissioner and, thereafter, first appeal against such order shall lie to the Appellate Tribunal.

f. The period taken by the proceedings before Commissioner and Approving Panel shall be excluded from time limitation for completion of assessment.

g. The Approving Panel shall be set up by the Board and would comprise of officers of rank of Commissioner and above. The panel will have a minimum of three members. The procedure and working of Panel shall be administered through subordinate legislation.

Consequences of GAAR

Some of the possible consequences as a result of implementation of GAAR are as follows:

(i) Negative impact in the M&A activities in India and uncertainty in India’s investment climate

(ii) Increased cost of compliances for companies

(iii) GAAR provision prone to misuse. Genuine tax planning arrangements may come within its ambit

(iv) Unwarranted increase in tax litigation