GAAR rules notified

The introduction of General Anti Avoidance Rules (“GAAR”) in the Income Tax Act, 1961 (the “Act”) has been relatively swift from the time GAAR was first proposed in the Direct Taxes Code, 2010 (“DTC”). Under the provisions of the Act, GAAR will take effect from April 1, 2015in respect of which, the working rules (the “Rules”) have now been notified[#_edn1][i]. The notification of the Rules may signify the Government’s intent to implement GAAR without any further deferral.

Salient features of the Rules

· GAAR would be applicable to arrangements which give rise to tax benefits on or after April 1, 2015 irrespective of the date on which an arrangement has been entered into. However, there is a grandfathering provision in respect of income arising from transfer of investments made before August 30, 2010, being the date on which the DTC (the first policy document which intended to introduce GAAR) was tabled in the Parliament.

Further, GAAR would not be applicable in the following situations:

– Threshold not exceeded – Where aggregate tax benefits arising to all the parties under an arrangement do not exceed INR 30 million for the tax year.

– Specified Foreign Institutional Investors (“FII’s”) – Where FIIs’ do not seek tax treaty benefits and make investments as per SEBI / other regulations.

– Non-resident investors of FIIs’ – Where direct or indirect investments have been made by non-resident investors in offshore derivate instruments issued by FIIs.

If GAAR is found to be applicable to a part of the arrangement, then tax consequences would be determined only with regard to that part of the arrangement.

Procedure for invoking GAAR

The Rules require the tax officer to issue a show cause notice with detailed reasoning regarding why the tax officer feels that GAAR should apply and to provide an opportunity of being heard to the tax payer before making a reference to the Commissioner for invoking GAAR.

Separately, it is worth noting that the time taken to make a reference for applicability of GAAR (refer the diagram below) (ie, the period commencing from the date on which a reference is received by the Commissioner to the date on which direction or order is received by the tax officer) would be excluded from the period of limitation, which elongates the period of tax audit. However, the taxpayer would have the remedy to directly appeal before the Income Tax Appellate Tribunal (“Tribunal”) against the order of the tax officer which is passed after approval of the Approving Panel