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1. After a five year long wait the Government is now empowered to examine a taxpayer's arrangements for accordance of tax laws. It is intriguing to note that these new set of rules could have far reaching consequences. The myth that General Anti-Avoidance Rules (GAAR) should normally apply only to structuring arrangements needs to be busted. This article navigates though the GAAR provisions in a lucid manner and explains how this could impact every business.
General Anti-Avoidance Rules: An introduction
2. Simply put, GAAR empowers the tax officer to review an arrangement entered into by the tax payer. On review, if the tax officer believes that the arrangement has been entered into for obtaining a tax benefit he/she can declare the transaction to be "impermissible avoidance arrangement".
There are following four principles under which the tax officer can test as to whether the transaction is an impermissible avoidance arrangement:
In the event a transaction falls into any one of the above categories then GAAR kicks in. There is also further guidance on what is commercial substance. These four principles are so broad based that they cover good ground on what is GAAR able.
Whom does it apply to?
3. It applies to all! Individuals, Hindu Undivided Families (HUF), Trusts, Partnership Firms, Limited Liability Partnership (LLP), and, of course, to corporate taxpayers. There is a threshold of INR 30 million prescribed and only when this is breached the tax officer can take action.
International tax practice
4. There is a growing concern amongst the revenue offices in many countries that taxpayers structure transactions to reduce the tax costs. The Base Erosion and Profits Shifting (BEPS) project of the Organization for Economic Cooperation and Development ("OECD") seeks to tackle this issue.
The BEPS Action plans have come out with various recommendations on the issue, both to address it within the international treaty framework (for example, introducing the principle purpose test, limitation of benefits clause, amending the permanent establishment clause, etc.) and in the domestic tax law context (for example, controlled foreign corporation rules, equalization levy, etc.).
Many countries have also implemented General Anti-Avoidance Rules in their domestic tax laws: United Kingdom, China, South Africa, Australia, Canada, Brazil.
GAAR: The Indian anti-abuse provisions
5. The reality of the GAAR provision is that the canvas is larger than one would have thought. A routine transaction that a company is executing could come under the GAAR scanner. Let us review a few situations to understand whether GAAR could be triggered?
Although clarification has been issued on many matters, yet there are a few technical nuances that will need to be tested in practice, like the example on "expressly and adequately" considered by the Court in a merger/demerger scheme. It will be prudent for companies to immediately review their transactions, even if it is routine and take an informed call on whether GAAR can be invoked? Else, after consumption of a transaction, a taxpayer would not want to be in a position with litigation and additional tax costs which were not budgeted for.