The Central Board of Direct Taxes (CBDT), Government of India, has revealed that the General Anti-Avoidance Rules (GAAR) that will be implemented from April 1 will be invoked in a fair and rational manner.
Addressing concerns ahead of the go live date, CBDT said that provisions of the GAAR will not apple to transaction that does not carry a tax benefit based on the jurisdiction it is routed through. The GAAR have been formulated with enough safeguards so as to ensure that they are invoked in “a uniform, fair and rational manner” through a two-stage process involving a nod at the level of principal commissioner of income tax and a panel headed by a high court judge.
GAAR give tax authorities the right to scrutinise and tax transactions which they believe are structured solely to avoid taxes; however, the CBDT has clarified that the GAAR will not interplay with the right of the taxpayer to select or choose method of implementing a transaction.
GAAR provisions shall be effective from assessment year 2018-19 and “shall not be invoked merely on the ground that the entity is located in a tax efficient jurisdiction,” the department said. “If the jurisdiction of FPI is finalised based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, GAAR will not apply.”
This essentially means that any transaction that carries a tax benefit could be questioned. The taxman may potentially want to know whether the transaction was done in the normal course of business or conducted simply with the intention to avoid taxes.
While the GAAR club is a small one with just 17 countries having implemented such rules, India is a late entrant. Australia implemented such rules way back in 1915 and some of the countries that have already enforced such rules include Singapore, China and the UK.
CBDT said the 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 said.
The proposal to apply GAAR will be vetted first by the Principal Commissioner/Commissioner of I-T and at the second stage by an Approving Panel headed by a judge of High Court.
CBDT further said 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. It would also not apply if an arrangement is held as permissible by the Authority for Advance Rulings.
The Tax Department also clarified that levy of penalty under GAAR would depend on “facts and circumstances of the case and is not automatic”.
CBDT today clarified that Rs 3 crore limit of tax benefit calculation for each arrangement cannot be read with a single tax payer as GAAR is with respect to an entire arrangement that has been entered into.