General Anti-Avoidance Rules: Current Position

General Anti-Avoidance Rules (GAAR) are general rules that target any transaction of business arrangement that is done for aggressive tax planning, tax avoidance or tax evasion. GAAR were introduced in Australia in 1981, Canada in 1988, South Africa in 2006 and China in 2008.

GAAR in India

In India, GAAR is still at proposed stage and current government has deferred implementation till April 2016.

Key Proposals in GAAR

The objective of GAAR is to check tax avoidance by giving additional powers to the Income Tax Department. The department will have powers to deny tax benefit if a transaction was carried out exclusively for the purpose of avoiding tax. It will be able to go deeper into ownership structures, beneficial ownerships, voting rights, transactions, etc. and lift the corporate veil if there is any artificial arrangement made just for the sake of avoiding taxation. The key proposals are as follows:

Minimum threshold for invoking GAAR

As per the proposals, GAAR can be invoked only if artificial arrangements have been done to avoid tax value of at least Rs. 3 Crore in a particular assessment year.

Applicability of GAAR to foreign institutional investors (FIIs)

GAAR provisions are not applicable to those SEBI-registered Foreign Institutional Investors (FIIs) which do not take any benefit under Double Taxation Avoidance Agreements (DTAA) entered by India with other countries. GAAR would also not apply to investment made by FIIs by way of offshore derivative instruments

‘Grandfathering’ of investments

This implies that the GAAR provisions will not apply in case of income from transfer of investments made before August 30, 2010

Consequence of impermissible arrangement in a transaction

Applicability of GAAR will be restricted to only that part of the arrangement which is regarded as an ‘impermissible avoidance arrangement’ by tax authorities, and not to the entire transaction

Powers of Income Tax Commissioner

The Income Tax Commissioner will be empowered to declare an arrangement as an Impermissible Avoidance Arrangement (IAA) if:

• The whole, a step or a part of the arrangement has been entered with the objective of obtaining tax benefit, and
• The arrangement creates rights and an obligation not normally created in arm’s length transactions or results in direct or indirect misuse or abuse of the provisions of the code or lack commercial substance in whole or part, or is not bonafide.

This is so far reaching in nature that almost each and every transaction, which results in saving tax could be regarded as an IAA.

This means that GAAR enables tax authorities to declare any arrangement entered into by a taxpayer as an IAA. If it is so declared, then the tax authorities can disregard, combine or re-characterize any step of such arrangement or the entire arrangement, disregard any accommodating party involved in such arrangement, treat the transaction as if it had not been entered into or carried out, reallocate any income or expenditure, look through any arrangement by disregarding any corporate structure, re-characterize debt as equity or vice-versa and so on.

In effect, for tax purposes, any transaction can be treated in a manner different from the manner in which it is carried out if it is regarded as an IAA.

Key concerns of Industry

The industry in one voice raised several concerns. The basic issue here is the trust deficit between the investors / corporate and the income tax department. The real fear was that overarching powers to the Income Tax department would create an environment of deterrence and would make doing business further difficult in India.

To draw the final guidelines, to bring tax clarity and to address the concerns of foreign investors in relation to GAAR, the UPA government in 2012 had set up the Parthasarathy Shome panel. This panel made the following important recommendations:

• The implementation of GAAR shall be deferred by three years.
• GAAR should be made applicable only if the monetary threshold of tax benefit is Rs.3 crore and more.
• GAAR should not be invoked to examine the genuineness of the residency FII from Mauritius.
• GAAR should apply “only in cases of abusive, contrived and artificial arrangements”.
• Short-term capital gains tax should be abolished and transaction tax should be increased.

Current Status

The UPA Government in 2013 had deferred GAAR for two years accepting recommendations of the Shome Panel. In the budget for 2015-16, FMM  Jaitley proposed postponing the implementation of GAAR by two more years. There are several questions that remain unanswered as follows:

• There are already some Special Anti-Avoidance Rules (SAARs) in the Income Tax Act. Will GAAR apply when these rules exist.

• What are the cases which would fall within and outside purview of GAAR; government should clarify this.
• Remove retrospective taxation.
• Government should create a special cadre of GAAR-trained tax administrators

The above extension is likely to be the last extension.

Conclusion

Tax avoidance is an international concern and comes heavy on the Government exchequer. Several countries have already codified GAAR laws or are in the process of doing so. India is no different and must codify the laws that check misuse of the tax treaties and legal loopholes to avoid taxes. While the carefully drafted GAAR rules should not deter the genuine investors, GAAR must be in place to show the world that India is not a tax haven.