Investment made on or after September 1, 2010 and till March 31, 2016 may attract GAAR provisions until they are compliant
Taxpayers usually arrange their affairs in such a way so that it would result in tax benefits. However, such measures have often raised questions from the revenue authorities about the legitimacy of such transactions. The issue as to whether reduction in tax liability through a transaction or a series of transactions is ‘tax planning’ or ‘tax avoidance’ has been the subject matter of debate both in India and overseas for the past several decades.
GAAR (General Anti Avoidance Rules) is a set of general rules enacted so as to check tax avoidance. The Indian government has taken initiative to introduce GAAR with a view to increase tax collection as tax avoidance is an area of concern all over the world. Most people across the world adopt various methods to reduce their total tax liability.
What is tax avoidance?
Tax avoidance generally means to avoid or reduce one’s tax liability, which would be otherwise incurred, by taking advantage of some provision or lack of provision in the law. Thus, in this case tax payer tries to reduce his tax liability but here the arrangement will be legal, although may not be according to the intent of the law. The taxpayer does not hide the key facts but is still able to avoid or reduce tax liability on account of some loopholes or otherwise.
What is grandfather clause?
Grandfathering refers to the introduction of a clause in a new law or regulation that exempts certain persons or businesses from abiding by it.
Grandfather clause is a situation in which an old rule continues to apply to some existing situations but a new rule will apply to all future situations. However, the exemption is limited it may extend for a definite time or it may be lost under certain circumstances. An exemption that allows persons or entities to continue with an activity they were engaged in before but the same activity is not allowed to new entities. For instance, an old car manufacturer is allowed to manufacture cars with certain environment norms, but new entities are required to fulfill strict norms.
Under the new norms, the government has set a cut-off date. Investments made before August 30, 2010, the date of introduction of the Direct Taxes Code, Bill, 2010, will be grandfathered. This means that such foreign investments will not come under the provisions of GAAR. At the same time, investment made on or after September 1, 2010 and till March 31, 2016 may attract GAAR provisions until they are compliant, according to new provisions.
Important amendments are being made in GAAR:
The assessing officer will be required to issue a show cause notice, containing reasons, to the assessee before invoking the GAAR provisions.
The assessee shall have an opportunity to prove that the arrangement is not an impermissible tax avoidance arrangement.
The assessing officer has to make reference to CIT (Commissioner of Income-tax) for invoking GAAR. The CIT, in turn, after affording opportunity to taxpayer, shall decide as to whether the arrangement is impermissible avoidance agreement, or not. If CIT is not satisfied with the reply of the taxpayer, he shall refer the matter to the Approving Panel.
The Approving Panel shall consist of a Chairperson, who is, or has been a Judge of a High Court; one Member of the Indian Revenue Service not below the rank of Chief Commissioner of Income-tax; and one Member who shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices. The current provision that the Approving Panel shall consist of not less than three members being Income-tax authorities or officers of the Indian Legal Service will be substituted.
The directions issued by the Approving Panel shall be binding on the assessee as well as the income-tax authorities. The current provision that it shall be binding only on the Income-tax authorities will be modified accordingly.
While determining whether an arrangement is an impermissible avoidance arrangement, it will be ensured that the same income is not taxed twice in the hands of the same taxpayer in the same year or in different assessment years. This situation may arise under the current provisions of GAAR.
Investments made before August 30, 2010, the date of introduction of the Direct Taxes Code Bill, 2010, will be ‘grandfathered’. It implies that GAAR provisions would not be invoked at the time of exit of investments which were made before August 30, 2010.
GAAR will not apply to such FIIs (foreign institutional investors) that choose not to take any benefit under tax treaties. GAAR will also not apply to non-resident investors in FIIs. Therefore, if an FII opts for provisions of the I-T Act (instead of tax treaty), GAAR would not be applicable.
A monetary threshold of Rs. 3 crore of tax benefit in the arrangement will be provided, in order to attract the provisions of GAAR.
GAAR vs SAAR
Anti avoidance rules are basically divided into two categories General and specific. GAAR refers to legislation dealing with “general” rules, while SAAR refers to legislation dealing “specific” avoidance. The prevailing law deals with instances of specific tax abuse and the general tax avoidance is addressed by judicial doctrine.
A GAAR typically comprises a set of broad rules based on general principles to counter potential avoidance of the tax in general, in a form which cannot be predicted and provided for at the time when the law is introduced. If enacted, this will be a new concept in Indian law.
On the other hand, Indian law has always had specific anti avoidance rules (SAAR) as distinct from GAAR. SAAR is a set of rules which target specific ‘known’ arrangements of tax avoidance. They specifically lay down the conditions where they may be invoked.
What is GAAR?