The Union Finance Ministry has announced that the General Anti Avoidance Rule (GAAR) will be effective from the 1 April, 2017.
In this regard Income Tax (IT) department has issued a slew of clarifications on implementation of GAAR, seeking to address concerns of foreign investors over implementation of the anti-evasion measure.
GAAR seeks to prevent companies from routing transactions through other countries to avoid taxes. The rules are framed mainly to minimize and check avoidance of tax. India will be the 17th nation in the world to have laws that aim to close tax loopholes. At present, GAAR is in force in nations like Australia, Singapore, China and the UK.
- GAAR seeks to give the IT department powers to scrutinize transactions structured in such a way as to deliberately avoid paying tax in India.
- It 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.
- It should be noted that LOB clause in tax treaties generally requires investors to meet certain spending and employment criteria to avail the benefits of the treaty.
- All transactions or arrangements approved by courts and quasi-judicial authorities like the authority for advance ruling and that specifically address the issue of tax avoidance will not be subject to the GAAR test.
- 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.
- In order to prevent misuse of GAAR provisions by the IT department, adequate safeguards also have been put in place based on which GAAR will be invoked.
- The proposal to apply GAAR first will be vetted 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.
- GAAR will not apply on foreign portfolio investor if its jurisdiction is based on non-tax commercial considerations and the main purpose is not to obtain tax benefits.