Tax department clarifies GAAR rules
The income-tax (I-T) department on Friday issued a slew of clarifications on implementation of the general antiavoidance rules (GAAR), seeking to address concerns of foreign investors over implementation of the anti-evasion measure from 1 April.
GAAR seeks to give the tax department powers to scrutinize transactions structured in such a way as to deliberately avoid paying tax in India. After being postponed twice, it is slated to be implemented from financial year 2017-18.
Last year, foreign investors had sought clarifications on the implementation of GAAR and the tax department had constituted a working group to look into their concerns.
Now, the government has clarified that GAAR will not be invoked in cases where investments are routed through tax treaties that have a sufficient limitation of benefit (LOB) clause to address tax avoidance.
An LOB clause in tax treaties generally requires investors to meet certain spending and employment criteria to avail the benefits of the treaty, to ensure that only genuine resident companies benefit from the pact.
The government has specified that all transactions or arrangements that have been approved by courts and quasijudicial authorities like the authority for advance ruling and that specifically address the issue of tax avoidance will not be subject to the GAAR test.
The government has also clarified that GAAR will not be applicable on compulsorily convertible instruments, bonus issuances or split/consolidation of holdings in respect of investments made prior to 1 April 2017 in the hands of the same investor.
Though the government had said that all investments made prior to 1 April 2017 will be kept out of GAAR’s purview, there were concerns that agreements related to compulsorily convertible debentures (CCDs) or bonus issuances entered into before this date but executed after GAAR becomes effective could come under the tax department’s scanner.
To prevent misuse of GAAR provisions by the tax department, adequate safeguards have also been put in place, based on which GAAR will be invoked.
The proposal to apply GAAR will be vetted first by an officer at the level of the principal commissioner or commissioner of income tax and at the second stage by an approving panel headed by a high court judge.
The income tax department has also clarified that if the jurisdiction of a foreign portfolio investor is finalized based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefits, GAAR will not apply.
Sudhir Kapadia, national tax leader at EY India, said in a note that though the circular does address some crucial issues, ideally clarifications by way of specific examples would have been better—like the specific nature of the LOBs that will be considered sufficient.