TaxTMI 
TaxTMI 
Final Report of the Expert Committee on General Anti Avoidance Rules (GAAR) in Income-tax Act, 1961
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.... is perceived by tax authorities as strictly legal in form but perhaps not in substance i.e. a business arrangement to avoid tax may not reflect its embedded legislative intent. Various authorities, have, therefore, felt that tax reduction through unethical means should not be allowed, particularly when headline rates of tax have been significantly reduced. This has led to the introduction of anti-avoidance rules in tax statutes across tax jurisdictions internationally. Vide Finance Act, 2012, India introduced the General Anti-Avoidance Rules (GAAR) in the Income-tax Act, 1961. These GAAR provisions were analyzed and, based on inputs received from various stakeholders, a number of recommendations are being made by the present Committee. The recommendations are for amendment in the Act, for guidelines to be prescribed under Income-tax Rules, 1962, and for clarifications and illustrations through circular. They are summarized in these categories as under. 1. Recommendations for amendments in the Income-tax Act, 1961 The Committee makes the following recommendations for amendment in the Act- (i) The implementation of GAAR may be deferred by three years on administrative gr....
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....on. On the other hand, such a measure-abolishing the tax on short term capital gains-may provide a big boost to capital markets, and, in turn, help attracting investments. (iii) The Act should be amended to provide that only arrangements which have the main purpose (and not one of the main purposes) of obtaining tax benefit should be covered under GAAR. (iv) Section 97 of the Act should be amended to include a definition of "commercial substance" as under - "An arrangement shall be deemed to be lacking commercial substance, if it does not have a significant effect upon the business risks, or net cash flows, of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained but for the provisions of this Chapter." (v) The definition of "connected person" may be restricted to "associated person" under section 102 and "associated enterprise" under section 92A. (vi) The section 97(2) may be amended to provide that the following factors: (i) the period or time for which the arrangement (including operations therein) exists; (ii) the fact of payment of taxes, directly or i....
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....ions for guidelines to be prescribed under Income-tax Rules The Committee makes the following recommendations for incorporation in guidelines to be prescribed under sections 101 and 144BA of the Act in the Income-tax Rules, 1962 - (i) The GAAR provisions should be subject to an overarching principle that - (1) Tax mitigation should be distinguished from tax avoidance before invoking GAAR. (2) An illustrative list of tax mitigation or a negative list for the purposes of invoking GAAR, as mentioned below, should be specified- (i) Selection of one of the options offered in law. For instance - (a) payment of dividend or buy back of shares by a company (b) setting up of a branch or subsidiary (c) setting up of a unit in SEZ or any other place (d) funding through debt or equity (e) purchase or lease of a capital asset (ii) Timing of a transaction, for instance, sale of property in loss while having profit in other transactions (iii) Amalgamations and demergers (as defined in the Act) as approved by the High Court. (3) GAAR should not be invoked in intra-group t....
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.... case of the same taxpayer in the same year as well as in different years, if any. However, no relief by way of corresponding adjustment should be allowed in the case of any other taxpayer. (viii) A requirement of detailed reasoning by the Assessing Officer in the show cause to the taxpayer may be prescribed in the rules. (ix) The tax audit report may be amended to include reporting of tax avoidance schemes above a specific threshold of tax benefit of Rs. 3 crores or above. (x) The following statutory forms need to be prescribed:- a. For the Assessing Officer to make a reference to the Commissioner u/s 144BA(1) (Annexe-8) b. For the Commissioner to make a reference to the Approving Panel u/s 144BA(4) (Annexe-9) c. For the Commissioner to return the reference to the Assessing Officer u/s 144BA(5) (Annexe-10) (xi) The following time limits should be prescribed that - (i) in terms of section 144BA(4), the Commissioner (CIT) should make a reference to the Approving Panel within 60 days of the receipt of the objection from the assessee with a copy to the assessee; (ii) in the case of the CIT accept....
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.... (b) in case the taxpayer is unwilling to submit a satisfactory undertaking as mentioned in (a) above, the Assessing Officer should have the authority with the prior approval of Commissioner, to inform the taxpayer of his likely liability in case GAAR is to be invoked during assessment procedure. There is a responsibility on the payer of any sum to a non-resident under Indian tax laws in the form of a withholding agent of the Revenue as well as representative assessee of the non-resident payee. The payer is required to undertake due diligence to ascertain the correct amount of tax payable in India and, in case of any default, it becomes the payer's liability to pay. Inquiries in the case of the GAAR under consideration in the UK indicated that UK has not addressed this issue. In any case, the UK follows a residence based principle of taxation unlike India which follows the source based principle. Hence, some assurance of collection may be necessary in the Indian case. (iv) To minimize the deficiency of trust between the tax administration and taxpayers, concerted training programmes should be initiated for all AO's placed, or to be placed, in the area of inter....
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....31 August 2012. (iii) Finalise the GAAR guidelines and a roadmap for implementation and submit these to the government by 30 September 2012. F. No.A.50050/95/2012-Ad.l Government of India Ministry of Finance Department of Revenue New Delhi Dated 17th July, 2012 OFFICE MEMORANDUM Sub.:- Constitution of an Expert Committee on GAAR to undertake stakeholder consultations to finalize the guidelines for General Anti Avoidance Rule (GAAR)-Reg. An Expert Committee on GAAR has been constituted with the approval of the Prime Minister to undertake stakeholder consultations and finalise the guidelines for General Anti Avoidance Rule (GAAR). This Committee would manage the consultation process and finalise the draft GAAR Guidelines. The Expert Committee consist of the following persons:- (i) Dr. Parthasarathi Shome - Chairman (ii) Shri N. Rangachary, former Chairman, IRDA & CBDT - Member (iii) Dr. Ajay Shah, Professor, NIPFP - Member (iv) Shri Sunil Gupta, Joint Secretary, Tax Policy & Legislation, Deptt. of Revenue - Member The terms of reference of the Committee is to- (i) Receive comments from stakeh....
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....lowed UK's principles and judicial pronouncements on such issues for a century while taking a different view wherever appropriate. However, India's 2012 GAAR draft guidelines cannot be said to have resembled UK's GAAR process. The UK has spent approximately four years in its GAAR consultation process. In India, GAAR as an instrument itself became clubbed with the matter of the Revenue Department's (henceforth, the Revenue) countering the Supreme Court's view by way of retrospective taxation through Finance Act 2012. GAAR, in conjunction with retrospective taxation, has thus generated world-wide opprobrium not only against the unpredictable approach to administration of the Indian tax authorities but also of policy makers who enact laws. The outcome is a widely held view that India is not a good place for investment at the moment. With this backdrop, three useful points may be noted - • The Indian government (henceforth Govt.) has no problem with tax mitigation by which is implied the use of tax incentives in not only a legal, but also transparent, manner by means of legitimate tax planning with the objective of achieving what tax professionals te....
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....iance costs of taxpayers as well as the uncertainty in the overall investment environment that instability in tax legislation and practice create. The Committee considered the process of consultation as a mainstay of its task. It undertook intensive consultations with stakeholders. It also received written representation from a number of stakeholders including professionals in tax advisory work, chambers of commerce and industry, foreign investor associations, industrialists, and policy makers. Based on inputs from consultations received in writing as well as orally, and applying its own views on each matter, the Committee formulated its draft Report which was put in public domain on 01 Sept. 2012. The Committee received a large number of suggestions and comments on its draft Report. After thorough examination of the suggestions, the Committee has finalized its Report. It must be mentioned, as will be seen from its recommendations, the Committee viewed that an appropriate implementation of GAAR should require selected legislative changes. It has not desisted, therefore, from making such recommendations. The final Report follows. 2. Tax Evasion, Tax Mitigation and Tax Avoid....
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....nd to cause distortions in the allocation of resources. Therefore, there is a strong view in the literature on tax policy that tax avoidance through artificial structures, is economically undesirable. Thus, on considerations of economic efficiency, fiscal justice, and revenue productivity, a taxpayer should not be allowed to use legal structures or transactions exclusively to avoid tax. In the past, the response to tax avoidance has been through the introduction of legislative amendments to deal with specific instances of tax avoidance. Since the liberalization of the Indian economy, increasingly sophisticated forms of tax avoidance have appeared. The problem has been compounded by tax avoidance arrangements spanning multiple tax jurisdictions. While introducing the GAAR provisions in the Income-tax Act, it was mentioned in the Explanatory Memorandum to the Finance Bill 2012, that the question of substance over form has consistently arisen in the implementation of taxation laws. In the Indian context, judicial decisions have varied on this. While some courts in certain circumstances have held that legal form of transactions can be dispensed with and the real substance of tran....
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....mentation of additional emerging, complex aspects of international and domestic taxation, in a manner commensurate with international practice. 3. GAAR Provisions: Analysis and Recommendations 3.1 Applicability of General Anti-Avoidance Rule The provisions relating to GAAR appear in Chapter X-A (sections 95 to 102) of the Act. Section 95 reads as under - "95. Notwithstanding anything contained in the Act, an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising therefrom may be determined subject to the provisions of this Chapter. Explanation.-For the removal of doubts, it is hereby declared that the provisions of this Chapter may be applied to any step in, or a part of, the arrangement as they are applicable to the arrangement." The section starts with a non-obstante clause which means, if there is a conflict with provisions, in other sections, then those of this section shall prevail over other conflicting provisions. The provisions allow the tax authority to, notwithstanding anything contained in the Act, declare an 'arrangement' which an assessee h....
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....result of a tax treaty; or (d) an increase in a refund of tax or other amount under this Act as a result of a tax treaty; or (e) a reduction in total income including increase in loss, in the relevant previous year or any other previous year. The term "benefit" has also been defined under section 102 as under - '(4) "benefit" includes a payment of any kind whether in tangible or intangible form; ' An analysis of these two definitions show that - (i) the term benefit has always been used as in the phrase "tax benefit" except in section 98 as "a benefit under a tax treaty", which implies the tax benefit only;. Hence, there is no need to define "benefit" separately; (ii) tax benefit includes not only tax but also other payments which could be interest, penalty etc.; (iii) tax benefit also means reduction in total income; (iv) tax benefit also includes deferral of tax liability even if there is no reduction of tax liability of all years taken together; (v) use of the phrase "increase in loss" suggests the intention to include potential loss of revenue. It has been pointed....
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.... an arrangement which results in misuse or abuse of the provisions of the tax law. It implies cases where the law is followed in letter or form but not in spirit or substance, or where the arrangement results in consequences which are not intended by the legislation, revealing an intent to misuse or abuse the law. For instance, refer to illustration 15 in section 4 of the Report. The third tainted element refers to an arrangement which lacks commercial substance or is deemed to lack commercial substance. It is discussed in detail in the next section. The fourth element refers to an arrangement which is carried out in, or by means of, a manner which is normally not employed for a bona fide purpose. In other words, it means an arrangement that possesses abnormal features. This is not a purpose test but a manner test. For instance, refer to illustration 24 in section 4 of the Report. Concerns have been raised that section 96(2) provides that an arrangement shall be presumed to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit, notwithstanding the f....
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....r than obtaining a tax benefit (but for the provisions of this Chapter) for a party. Clause (a) is the codification of substance v. form doctrine. It implies that where substance of an arrangement is different from what is intended to be shown by the form of the arrangement, then tax consequence of a particular arrangement should be assessed based on the "substance" of what took place. In other words, it reflects the inherent ability of the law to remove the corporate veil and look beyond form. Item (i) of clause (b) deems an arrangement, which includes round tripping of funds, to lack commercial substance. The phrase "round trip financing" has been further defined as under - "(2) For the purposes of sub-section (1), round trip financing includes any arrangement in which, through a series of transactions- (a) funds are transferred among the parties to the arrangement; and (b) such transactions do not have any substantial commercial purpose other than obtaining the tax benefit (but for the provisions of this Chapter), without having any regard to- (A) whether or not the funds involved in the round trip financing ca....
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....ether an arrangement lacks commercial substance, namely- (i) the period or time for which the arrangement (including operations therein) exists; (ii) the fact of payment of taxes, directly or indirectly, under the arrangement; (iii) the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement. Stakeholders raised serious doubts regarding ignoring the attributes of an arrangement in sub section (4) since they tend to reflect the intentions, bonafide or otherwise, behind an arrangement. Their view is relevant and discussed later in para 3.17. It should be clarified through legislative amendment that factors (i) to (iii) in section 97(4) of the Act are not sufficient (instead of being totally irrelevant) for an arrangement to be excluded from the commercial substance test but may be relevant in the consideration of other aspects of GAAR. 3.4 Consequence of impermissible avoidance arrangement As per section 98(1), if an arrangement is declared to be an impermissible avoidance arrangement, then the consequences may include denial of tax benefit or a benefit under a....
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....nd includes associated person. Concerns have been raised that the definition of "connected person" u/s 102(5) is too broad and ambiguous. A committee under DGIT (IT) had recommended that it may be clarified that - "Connected person" would include the definition of "associated enterprise" given in section 92A, the definition of 'relative' in section 56 and the "persons" covered u/s 40A(2)(b). The clarification, instead of restricting the scope of the term, effectively broadened it. Moreover, 'relative' in section 56 and the "persons" covered u/s 40A(2)(b) are already covered in the definition of associated person under section 102. In view of the above, the Committee recommends that the definition of connected person may be restricted only to "associated person" under section 102 and "associated enterprise" under section 92A. 3.6 Application of Chapter As per section 100, the provisions of Chapter X-A shall apply in addition to, or in lieu of, any other basis for determination of tax liability. 3.7 Framing of guidelines As per section 101, the provisions of Chapter X-A shall be applied in accordance with such guidelines and subject to such ....
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....hall refer the matter to an Approving Panel (AP). In case the assessee does not reply or object, the CIT shall make determination as to whether the arrangement is an impermissible avoidance arrangement or not. (ii) The AP has to dispose of the reference within a period of six months from the end of the month in which the reference was received from the CIT. (iii) The AP shall either declare an arrangement to be impermissible or declare it not to be so after examining material and getting further inquiry to be made. (iv) The AO will determine the consequences of a positive declaration of arrangement as impermissible avoidance arrangement. (v) The final order in case any consequence of GAAR is determined shall be passed by the AO only after approval by the CIT and, thereafter, first appeal against such order shall lie to the Appellate Tribunal. (vi) The period taken by the proceedings before the CIT and AP shall be excluded from time limitation for completion of assessment. In addition to the above, it is provided that the Board (CBDT) shall prescribe a scheme for regulating the condition and manner of application of these provisions. 3.10.2 Prescript....
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.... more options offered by law, or the timing of a particular transaction, in itself, may be considered to be tax avoidance. Reference was made several times to the UK experience where an independent study commissioned by HMRC arrived at the view that a broad spectrum GAAR would not be beneficial to the UK system as it may erode the attractiveness of the UK's tax regime to businesses, and therefore suggested a moderate rule which is targeted at arrangements that are contrived and artificial. It was, therefore, submitted to this Committee to take a balanced approach. It is being generally perceived that GAAR provisions, as currently drawn up, provide for treating an arrangement as an impermissible avoidance arrangement without first examining whether the arrangement is an avoidance arrangement or not. This is particularly important since an avoidance arrangement should be first distinguished from tax mitigation and second, if it is avoidance, whether it may, nevertheless, be permissible. Thus, every case of tax avoidance should not be considered under GAAR unless it is an abusive, artificial and contrived arrangement. Tax mitigation, as has been explained in Section 2, means....
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....rrently, all transactions in listed securities being equity shares or units of equity oriented mutual fund are subject to Securities Transaction Tax (STT). Long term capital gains arising on transfer of such shares or units (after holdings for more than 12 months) are exempt from taxation; and short term capital gains are taxable at 15%. Present revenue from taxation of capital gains from such securities is less than Rs 3000 crore. However, there would be some revenue foregone on account of non-taxation of short term capital gains in the case of FIIs who avail treaty benefit (mainly India-Mauritius and India-Singapore tax treaties). The tax depends also on the nature of income, whether business profit or capital gains. Thus business income is taxed at 30%. Distinguishing capital gains and business income depends on several factors, and disagreements have resulted in numerous litigation cases between the Revenue and taxpayers. A significant outcome of the present tax regime is that fund managers of foreign investors do not base themselves in India as the presence of fund managers would constitute permanent establishment of such investors in India. Consequently, the business....
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....) Tax administration is more mature for implementation of such law; (iv) There is a conducive economic environment for application of such law. The GAAR provisions were introduced in the public domain in 2009 through the first draft of the Direct Taxes Code (DTC). Subsequently, the provisions were introduced in the DTC Bill 2010. The Parliamentary Standing Committee on Finance has had discussions with stakeholders. The Govt. has deferred it by one year from 2012 to 2013. The guidelines could now be notified once this Committee's Report is commented upon and selected comments are incorporated. As discussed earlier, there has been a paradigm shift in tax policy and countries all over the world have resorted to anti-avoidance rules in their domestic law. In India, introduction of GAAR through Finance Act, 2012 has been taken as a shock by the stakeholders although GAAR has been in public domain for discussion since 2009. Probably, it was due to the challenging economic environment. The market had also not prepared itself for such a measure. There has been serious apprehension about its immediate implementation. Considering the vast discretionary powers to the ....
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....it was well known that certain treaties were used for treaty shopping but the method was kept alive on account of investments that flowed into India. Be that as it may, Govt. defended its action before the Supreme Court in the case of Azadi Bachao Andolan wherein the Court held that treaty shopping may be unethical but not illegal. It had also upheld Circular 789 dated 13.04.2000 which precluded the tax administration to enquire into the genuineness of tax residency certificate (TRC) issued by the Mauritius authorities. It was, therefore, requested to grandfather all existing arrangements. Stakeholders pointed that substantive investments have come to India by way of portfolio investment or foreign direct investment from two jurisdictions Singapore and Mauritius based on the effective assurance that, on exit, no tax would be levied in accordance with the relevant tax treaty. Now, it would be unfair according to many stakeholders, both domestic and international, to say that no tax exemption would be provided if they exit after 01.04.2013. While examining the DTC Bill 2010, the Parliamentary Standing Committee on Finance recommended that all existing arrangements existing as o....
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....hdrawn, whether it would still be applicable to avail treaty benefit. In view of the above, the Committee recommends that, where Circular No. 789 of 2000 with respect to Mauritius is applicable, GAAR provisions shall not apply to examine the genuineness of the residency of an entity set up in Mauritius. As needed, the Mauritius treaty itself should be revisited if policy so dictates, rather than challenged indirectly through the use of the GAAR instrument. 3.16 Treaty override Stakeholders submitted that so long as the taxpayer falls in the definition of resident as defined in the relevant tax treaty, it should be sufficient and he should be precluded from the applicability of GAAR. It is an internationally accepted principle of interpretation of interplay between domestic law and a tax treaty that, in case of conflict between the provisions of the domestic law and the treaty, whatever is more beneficial (between domestic law and the treaty) to the taxpayer is applicable. This principle has also been codified in section 90 of the Income-tax Act. Reliance is usually placed on the preamble of a tax treaty i.e. the treaty is for avoidance of double taxation and preve....
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....an in the above judgment: "It is often said that insufficient legislation in the countries where they operate gives opportunities for money laundering, tax evasion etc. and, hence, it is imperative that the Indian Parliament would address all these issues with utmost urgency." (para 53)(emphasis added) Considering such views expressed by the courts, there is a role for anti-avoidance rules to prevent abuse of tax treaties. Indeed, Parliament enacted GAAR to deal with tax avoidance schemes in both domestic law as well as cross-border transactions though GAAR's perceived wide interpretation rather than a narrow and strict focus on anti-abuse, has led to vociferous opposition to it. On the issue whether specific provisions of the domestic law of a contracting state that are intended to prevent tax abuse conflict with tax treaties, the OECD in its commentary on Model Convention has stated as under- 9.2 For many States, the answer to the first question is based on their answer to the second question. These States take account of the fact that taxes are ultimately imposed through the provisions of domestic law, as restricted (and in some rare cases, broadened)....
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....s anti-avoidance provisions, such provisions should not be substituted by GAAR provisions under the treaty override provisions 3.17 Factors not relevant for determination of commercial substance Stakeholders submitted that certain terms used in GAAR should be defined in a positive way instead of being negatively defined. It was suggested that a negative list in the GAAR provisions relating to commercial substance under section 97(4) of the Act be deleted. Provisions of section 97(4) of the Act read as under - "97(4) The following shall not be taken into account while determining whether an arrangement lacks commercial substance or not, namely:- (i) the period or time for which the arrangement (including operations therein) exists; (ii) the fact of payment of taxes, directly or indirectly, under the arrangement; (iii) the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement." It was argued that the above provisions have introduced in direct conflict with the observation of the Supreme Court in the case of Vodafone wherein the Court laid down the followin....
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....ming a holistic assessment to determine whether an arrangement lacks commercial substance. When the AO informs the assessee in his initial intimation invoking GAAR, he should include how the above factors (i) to (iii) have been considered and why they fail to convince the AO that GAAR should not be applied in the particular case. 3.18 Threshold to be prescribed for applying GAAR provisions. Stakeholders submitted that the threshold to be prescribed for applying GAAR should be high enough to capture only highly sophisticated structures. In the draft guidelines, it is proposed to provide a monetary threshold of tax benefit of ....lakhs of rupees to the taxpayer in a year. Various concerns expressed by stakeholders relating to this were - (i) the monetary threshold of "tax benefit" should consider only the tax amount and not any other amount; (ii) in cases of tax deferral, how the tax benefit would be computed; (iii) the threshold should be high enough; (iv) can there be any other criterion of specifying monetary threshold i.e. total turnover, sales or value of transactions; (v) threshold should be qua....
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....and contribute about 95% of total corporate tax revenue. Similarly, companies having PBT of Rs 10 crore and above account for 1.34% (6,141 in number) of all companies and contribute about 87% of total corporate tax revenue (see Annexe-7). It is recommended to apply GAAR to companies having PBT in a year of more than Rs.10 crore in the initial five years to minimize any adverse impact on smaller taxpayers. As large scale training in enhancing tax administration practices and accountability is undertaken and put in place, the threshold level may be reduced (so that the number of companies covered may increase under GAAR). Based on the above figures, a threshold tax benefit limit of Rs 3crore may be considered. Hence the recommended threshold based on tax benefit should imply a scope of about 6000 companies. The tax benefit should be considered separately for each arrangement, not taking all arrangements together unless the arrangements are interlinked or connected with each other. Other criteria such as turnover or sales should not be used as profitability of different sectors varies widely. In view of the above, the Committee recommends that a monetary threshold of Rs....
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.... the respective contracting state as the case may be, in the immediately preceding period of 24 months from the date the gains arise. So, if a company incorporated in Singapore incurs operating expenditure equal to, or in excess of, the aforesaid limits, then GAAR cannot be invoked to look into the genuineness of the company. But if there are SAAR elements that are revealed in its operations, then SAAR would be invoked. In view of the above, the Committee recommends that that where SAAR is applicable to a particular aspect/element, then GAAR shall not be invoked to look into that aspect/element. Similarly where anti-avoidance rules are provided in a tax treaty in the form of limitation of benefit (as in the Singapore treaty) etc., the GAAR provisions shall not apply overriding the treaty. If there is evidence of violations of anti-avoidance provisions in the treaty, the treaty should be revisited, but GAAR should not override the treaty. As specific treaty override has been provided in the Act (through amendment of section 90 and 90A of the Act vide Finance Act, 2012) for the purposes of application of provision of GAAR, it would require amendment of the Act. 3.20 Corre....
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....it would diminish GAAR's deterrent role. GAAR is after all an anti-avoidance provision that should have deterrent consequences as a potential risk faced by aggressive tax planners and corresponding adjustments across different taxpayers would militate against deterrence. And, under SAAR, such corresponding adjustments are not allowed either. In view of the above, the Committee recommends that, while determining tax consequences of an impermissible avoidance arrangement, corresponding adjustment should be allowed in the case of the same taxpayer in the same year as well as in different years, if any. However, no relief by way of corresponding adjustment should be allowed in the case of any other taxpayer. 3.21 Implementation of onus on the Revenue authority Stakeholders represented that adequate safeguards should be built in to ensure that the Revenue discharge their onus effectively, by providing detailed reasoning for claiming an arrangement to be an impermissible avoidance arrangement rather than merely alleging an arrangement to be an impermissible avoidance arrangement. The onus of initiating and demonstrating that there is an impermissible avoidance arrangement....
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.... economic aspects of the arrangement. Such member should be a person having expertise in the industry in which the relevant taxpayer is engaged. Section 144BA(14) has empowered the CBDT to constitute an AP consisting of not less than 3 members, out of which one member of the panel would be an officer of the level of Joint Secretary or above from the Ministry of Law, the others being from the Revenue of the rank of Commissioner or above. In the draft guidelines that are under examination by this Committee, the following recommendations were made- (a) To begin with, there should be one AP, which shall be situated in Delhi. Subsequently, the CBDT should review the number of Approving Panels required on the basis of the workload in FY 2014-15. (b) The AP should comprise three members, of which two members should be of the level of Chief Commissioner of Income Tax and the third member should be an officer of the level of Joint Secretary or above from the Ministry of Law. All the members should be full time members. (c) The AP should be provided secretariat staff along with appropriate budgetary and infrastructure support by the CBDT. The secretariat should ....
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....g Panel as elaborated above. 3.23 Withholding of taxes Stakeholders raised concerns about the procedure to be followed while determining withholding tax liability. They submitted that at the time of withholding, GAAR provisions should not be considered. Specific safeguards of seeking approval from the AP have been provided in determining tax liability under an assessment proceeding. There is no clarity whether GAAR provisions can be invoked by the AO while disposing of an application for determination of a withholding tax amount under section 195(2) or 197 of the Act. On the one hand, the concern of the Revenue is that, if remittance is allowed without consideration of GAAR, then subsequently it may not be feasible to recover the amount from a non-resident in case an instance of impermissible avoidance arrangement comes to light at a later stage. On the other hand, stakeholders felt that invoking GAAR at the stage of withholding would increase their compliance burden disproportionately and that there would be undue delay in remittance. This would, in turn, make business processes unworkable and prohibitive. Concerns of both the Revenue and stakeholders are valid and,....
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....not to take any benefit under an agreement entered into by India under section 90 or 90A of the Act and subjects itself to tax in accordance with the domestic law provisions, then, the provisions of Chapter X-A shall not apply to such FII or to the non-resident investors of the FII. Where an FII chooses to take a treaty benefit, GAAR provisions may be invoked in the case of the FII, but would not in any case be invoked in the case of the non-resident investors of the FII." Stakeholders expressed the concern that the above clarification provides certainty only to immediate (first level) investors in the FII. As the FII structure is generally multi-layered and may be a synthetic investment structure (use of offshore derivative instruments), an investor may exist at subsequent / upper levels, and may not be a direct investor in the FII. Let us consider the above structure of investment by an FII in India. It has two feeder funds I and II. Fund I receives investments from investors (say A category) across the globe from investors (say B category) by issue of units like a mutual fund. Fund II receives investments from investors against issue of offshore derivative instrum....
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....rust between tax administration and taxpayers; • anticipated attempts to invoke GAAR in a general manner, if not in every possible case; • lack of accountability in the manner in which tax officers conduct business, and for its outcome; • fear of audit by C&AG ; • compulsion for tax officers to meet budget targets; • past experience in implementing regulations pertaining to transfer pricing which gave little confidence, according to them, in fair and appropriate implementation; • advance ruling not being obtained in the specified period of six months. In order to allay fears of tax payers, a number of safeguards have been built into the GAAR provisions. It is not a one-to-one relationship between the tax officer and taxpayer like in other tax implementation instruments. A three stage process for invoking GAAR with a national level panel is intended to provide consistency and uniformity in the application of GAAR. Nevertheless, there is indeed a significant trust deficiency, some of which reflects the independence of interpretation of various statutes by AO's acro....
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....tential anti-avoidance cases in good time. In view of the above, the Committee recommends that the tax audit report may be amended to include reporting of tax avoidance schemes above a specific threshold of tax benefit of Rs. 3 crores or above which is considered by the tax auditor as more likely than not to be held as an impermissible avoidance arrangement under the Act. 4. Illustrative cases where GAAR provisions will be considered applicable or not applicable It is clarified that the illustrations given below should be considered as a guide to the overall intent of GAAR. They comprise an indicative list, and cannot be construed as an exhaustive list of GAAR cases Example 1: Facts:- M/s India Chem Ltd. is a company incorporated in India. It sets up a unit in a Special Economic Zone (SEZ) in F.Y. 2013-14 for manufacturing of chemicals. It claims 100% deduction of profits earned from that unit in F.Y. 2021-22 and subsequent years as per section 10AA of the Act. Is GAAR applicable in such a case? Interpretation: There is an arrangement of setting up of a unit in SEZ which results into a tax benefit. However, this is a case of tax mitigation where the tax pa....
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....e has been shifting or reconstruction of business from unit B to unit A for the main purpose of obtaining tax benefit? Interpretation: The issue of tax avoidance through shifting/reconstruction of existing business from one unit to another has been specifically dealt with in section 10AA of the Act. Hence, the Revenue would not invoke GAAR in such a case. Example -2: Facts:- An Indian company (Indco) has set up a holding company (Holdco) in a no tax jurisdiction outside India (say NTJ) which has set up further subsidiary companies (Subco A and Subco B) which pay dividends to Holdco. Such dividends are not repatriated to Indco. Can GAAR be invoked to look through Holdco to tax dividends in the hands of Indco? Interpretation: Declaration/repatriation of dividend is a business choice of a company. India does not have anti-deferral provisions in the form of Controlled Foreign Company (CFC) rules in the I.T. Act. Accordingly, GAAR would not be invoked in such a case. Example -2A: Facts:- In the above example 2, dividend is accumulated in Holdco for a number of years and subsequently, Holdco is merged into Indco through a cross-border merger. Can GAAR be....
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....uity. Would the interest be denied as an expense deduction under GAAR? Interpretation: There is no specific provision dealing with thin-capitalization in the I.T. Act. An evaluation of whether a business should have raised funds through equity instead of debt should generally be left to commercial judgment of a taxpayer and GAAR would not be attracted. Example 5A Facts:- In the above example 5, the loan agreement between Indco and X Ltd. provide that Indco shall pay interest annually at the rate as mentioned below: Rate of interest = (Annual Profit of the Indco/Loan amount)*100 Can GAAR be invoked in such a case? Interpretation: This is a case where the form of the arrangement is to show Indco has received a debt from X Ltd. but in substance there is high likelihood that it is equity investment, as the rate of interest is directly based on the rate of return, or profit of Indco. Thus, it could be viewed as an arrangement whose main purpose is to obtain a tax benefit by claiming actual dividend payment as interest payment. The tainted element here is the abnormal manner in which such a transaction is being carried out which would not be so in case of a b....
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....tempt to hide the source of funds of Subco. Example 6 Facts:- Indco incorporates a Subco in a NTJ with equity of US$100. Subco has no reserves; it gives a loan of US$100 to Indco at the rate of 10% p.a. which is utilized for business purposes. Indco claims deduction of interest payable to Subco from the profit of business. There is no other activity in Subco. Can GAAR be invoked in such a case? Interpretation: The main purpose of the arrangement is to obtain interest deduction in the hands of Indco and thereby tax benefit. There is no commercial substance in establishing Subco since without it there is no effect on the business risk of Indco or any change in the cash flow (apart from the tax benefit). Moreover, it is a case of round tripping which means a case of deemed lack of commercial substance. Hence, it would be treated as an impermissible avoidance arrangement. Consequently, in the case of Indco, interest payment would be disallowed by disregarding Subco. No corresponding relief would be allowed in the case of Subco by way of refund of taxes withheld, if any. Example 7 Facts:- Indco incorporates a Subco in a NTJ with equity of US$100. Subco giv....
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....49% of X Ltd's equity is allotted to A Ltd. and 51% is allotted to Z Ltd.. (viii) Thereafter, the shares of X Ltd. held by A Ltd. are sold to C Ltd., a company connected to the Z Ltd. group. As per the tax treaty with country F1, capital gains arising to A Ltd. are not taxable in India. Can GAAR be invoked to deny the treaty benefit? Interpretation The arrangement of routing investment through country F1 results into a tax benefit. Since there is no business purpose in incorporating company A Ltd. in country F1 which is a LTJ, it can be said that the main purpose of the arrangement is to obtain a tax benefit. The alternate course available in this case is direct investment in X Ltd. joint venture by Y Ltd. The tax benefit would be the difference in tax liabilities between the two available courses. The next question is, does the arrangement have any tainted element? It is evident that there is no commercial substance in incorporating A Ltd. as it does not have any effect on the business risk of Y Ltd. or cash flow of Y Ltd. As the twin conditions of main purpose being tax benefit and existence of a tainted element are satisfied, GAAR may be invoked. ....
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.... capital gains arising on buyback of shares at the applicable rate. Can GAAR be invoked on the ground that there is a deferral of tax liability by X Ltd., the Indian company? Interpretation: Whether to pay dividend to its shareholder, or buy back its shares or issue bonus shares out of the accumulated reserves is a business choice of a company. Further, at what point of time a company makes such a choice is its strategic policy decision. Such decisions cannot be questioned under GAAR. Example -12A: Facts:- In the above example 12, let us presume, there is a DTAA between India and Country C1 which provides that capital gains arising in India to a resident of country C1 shall not be taxed in India provided that the resident incurs $200,000 annually as operating expenditure. The shareholder Y Ltd. incurs an operating expenditure above that limit and is entitled to the treaty benefit. Y Ltd. therefore does not pay any tax on capital gains. Can GAAR be invoked on the ground that accumulation of profits by company X Ltd. and subsequent buyback is an arrangement mainly to obtain tax benefit? Interpretation: Payment of dividend to its shareholder or buy back of it....
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....old the shares of V Ltd to A Ltd. which was incorporated in F2. The companies G Ltd and H Ltd claimed benefit of tax treaty and the resultant gains from the transaction are claimed to be not taxable. Can GAAR be invoked to deny treaty benefit? Interpretation: The alternative courses available to taxpayer to achieve the same result (with or without the tax benefit) are: (i) Option 1 (as mentioned in facts) : X Ltd. liquidated, G Ltd. and H Ltd. become shareholders of V Ltd.; A Ltd. acquires shares from G Ltd. and H Ltd.; and becomes shareholder of V Ltd. (ii) Option 2: A Ltd. acquires shares of X Ltd. from G Ltd. and H Ltd.; X Ltd. is liquidated; and A Ltd. becomes shareholder of V Ltd. (iii) Option 3: X Ltd. sells its entire shareholding in V Ltd. to A Ltd. and subsequently, X Ltd is liquidated. In Options 1 & 2, there is no tax liability in India except the deemed dividend taxation to the extent reserves are available in X Ltd. This is because of the treaty between India and country F1. In option 3, tax liability arises to X Ltd., an Indian company, on sale of shares of V Ltd. Subsequently, when X Ltd. is liquidated, tax liability arises on acco....
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....ition of investor A Ltd. in any manner (i.e on business risks or cash flow), and reveals a tainted element of abuse of tax laws. Hence, the arrangement would be treated as an impermissible avoidance arrangement by invoking GAAR. Consequently, treaty benefit would be denied by ignoring K and L, the two subsidiaries, or by treating K and L as one and the same company for tax computation purposes. Example -16: Facts:- A Ltd. is a resident of country F5 and is wholly owned by company M Ltd. in country C1. M Ltd. is a financial company with substantial reserves and is looking for investments in India. M Ltd uses A Ltd, its subsidiary company, to route its investment in Z Ltd., an Indian company, whereby A Ltd purchases the shares of Z ltd. Later, A Ltd sells the shares of Z Ltd to C Ltd., another company, and realizes capital gains. As per the provisions of relevant DTAA between country F5 and India, a shell/conduit company is not eligible for capital gains exemption in India. However, a company shall not be deemed to be a shell/conduit company if its total annual expenditure on operations in country F5 is equal to, or more than, $ 200,000/- in the immediately preceding pe....
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....company N situated in country F1 which has a provision of residence based taxation of capital gains in its tax treaty with India. N further invests the funds in equities in India and earns capital gains. The taxpayer claims that - (i) as SPV, a neutral jurisdiction was needed and, after exploring various options, country F1 was selected; (ii) it is easy to incorporate a company in F1; it is easy to operate; cost of compliance is low; and it is easy to migrate; (iii) there is no tax liability in country F1; (iv) the treaty network of country F1 protects investments and also saves taxes in jurisdictions including India. Can GAAR be invoked in such a case? Interpretation: The arrangement results into a significant tax benefit to the investors by routing their investments through country F1. Can it be said that obtaining tax benefit in India is the main purpose of the arrangement? Given the facts, it may be held that forming an SPV in an efficient jurisdiction was the main purpose of the arrangement and obtaining tax benefit was not the main purpose of the arrangement. Hence, the Revenue would not invoke GAAR with regard to this arrangeme....
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....ney from Company Y and used it to buy shares in three 100% subsidiary companies of X. Though the fair market value per share was Rs.100, X paid Rs. 600. The amount received by the said subsidiary companies was transferred back to another company connected to Y. The said shares were sold by X for Rs. 100/5 each and a short-term capital loss was claimed. This was set off against short-term capital gains from other sources. All the companies are Indian companies. Can GAAR be invoked? Interpretation: By the above arrangement, the tax payer has obtained a tax benefit and created rights or obligations which are not ordinarily created between persons dealing at arm's length. Since transactions of purchase and sale of shares of a closely held company at a price other than the fair market value are covered under section 56 of the Act, GAAR may not be invoked as section 56, being SAAR, is applicable. However, if SAAR is not applicable considering the limited scope of section 56 to the shares of closely held companies only, then GAAR may be invoked. Example -22: Facts:- Y Tech Ltd. is a company resident of country C1. It enters into an agreement with Z Energy Ltd., an Ind....
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....rice based on the rate of interest clearly suggest that it was given a form of purchase and sale of goods but in fact it was a financing arrangement. The sole purpose of the arrangement is to obtain a tax benefit. The substance or effect of the arrangement as a whole, is inconsistent with the form of its individual steps. Thus, it may be deemed to lack commercial substance. Hence, GAAR may be invoked to recharacterise the capital gains in the hands of B Ltd as interest income and taxed at applicable rates. Further, corresponding deduction of interest expense would not be allowed in the case of A Ltd. Example 23A: Facts:- In the above example, let us presume that B Ltd instead of having a forward sale price, has a put option to sell at a rate of Rs 1100 on 1st Jan 2021. On that date, the market price of the assets is Rs 900 only. Hence, B Ltd exercises its option and sells the assets at Rs 1100 to A Ltd. as per the put option. Can GAAR be invoked in such a case? Interpretation This case is different from example 23 since it is not a simple financing arrangement, as an element of risk is involved. If the price of the goods on 1st Jan 2021 goes beyond Rs 1100, then B ....
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....rovided by a firm or individual, then payment for such services are taxable only if the firm has a fixed base in India or stay of partners/ employees in India exceed 180 days. M/s Global Architects Inc forms a partnership firm with a third party (director of the company) having only a nominal share in the F1. The firm enters into an agreement to carry out the services in India. The company seconded its trained manpower to the firm. Thus, the partnership firm claimed the treaty benefit and no tax was paid in India. Can such an arrangement be examined under GAAR? Interpretation It is obvious that there was no commercial necessity to create a separate firm except to obtain the tax benefit. The firm was only on paper as the manpower was drawn from the company. The firm did not have any commercial substance. Moreover, it is a case of treaty abuse. Hence, GAAR may be invoked to disregard the firm and tax payment for architectural services as fee for technical services. However, the rate of tax on such payment shall be as applicable under the treaty, if more beneficial. Example 26: Facts:- A company X Ltd. has property that it proposes to transfer to a third party. ....
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....n, operation, scheme, agreement or understanding, whether enforceable or not, and includes the alienation of any property in such transaction, operation, scheme, agreement or understanding; Applies to an impermissible avoidance arrangement and "arrangement" means any step in, or a part or whole of, any transaction, operation, scheme, agreement or understanding, whether enforceable or not, and includes any of the above involving the alienation of property. Applies to an impermissible avoidance arrangement and "arrangement" means any step in, or a part or whole of, any transaction, operation, scheme, agreement or understanding, whether enforceable or not, and includes any of the foregoing involving the alienation of property. 2 IMPERMISSIBLE AVOIDANCE ARRANGEMENT: An impermissible avoidance arrangement means an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and it- (a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length; (b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act; (c) lacks commercial substan....
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....the person obtaining the tax benefit proves that obtaining the tax benefit was not the main purpose of the arrangement. 2. An arrangement shall be presumed to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or part of, the arrangement is to obtain a tax benefit, regardless of the fact that the main purpose of whole arrangement may not be to obtain a tax benefit. 4 Arrangement to lack commercial substance: (1) An arrangement shall be deemed to lack commercial substance if- (a) the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or (b) it involves or includes- (i) round trip financing; (ii) an accommodating party; (iii) elements that have effect of offsetting or cancelling each other; or (iv) a transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction; or (c) it involves the location of an asset....
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....differs significantly from, the legal form of its individual steps; or (c) it includes, or involves- (i) round trip financing without regard to,- (A) whether or not the round tripped amounts can be traced to funds transferred to, or received by, any party in connection with the arrangement; (B) the time, or sequence, in which round tripped amounts are transferred or received; or (C) the means by, or manner in, which round tripped amounts are transferred or received; (ii) an accommodating or tax indifferent party; (iii) any element that have the effect of offsetting or canceling each other; or (iv) a transaction which is conducted through one or more persons and disguises the nature, location, source, ownership, or control, of the fund; "round trip financing" includes financing in which- (a) funds are transferred among the parties to the arrangement; and (b) the transfer of the funds would- (i) result, directly or indirectly, in a tax benefit but for the provisions of section 123; or (ii) significantly reduce, offset or eliminate any business risk incurred by any party to the arrangement; "accommodating party" means a party to an....
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....isregarding, combining or rechara-cterising any step in, or a part or whole of, the impermissible avoidance arrangement; (b) treating the impermissible avoidance arrangement as if it had not been entered into or carried out; (c) disregarding any accommodating party or treating any accommodating party and any other party as one and the same person; (d) deeming persons who are connected persons in relation to each other to be one and the same person for the purposes of determining tax treatment of any amount; (e) reallocating amongst the parties to the arrangement- (i) any accrual, or receipt, of a capital or revenue nature; or (ii) any expenditure, deduction, relief or rebate; (f) treating- (i) the place of residence of any party to the arrangement; or (ii) the situs of an asset or of a transaction, at a place other than the place of residence, location of the asset or location of the transaction as provided under the arrangement; or (g) considering or looking through any arrangement by disregarding any corporate structure. (2) For the purposes of sub-section (1),- (i....
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....shall apply subject to such conditions and in the manner as may be prescribed. the consequences, under this Code, of the arrangement may be determined by,- (a) disregarding, combining or recharacterising any step in, or a part or whole of, the impermissible avoidance arrangement; (b) treating the impermissible avoidance arrangement- (i) as if it had not been entered into or carried out; or (ii) in such other manner as in the circumstances of the case the Commissioner deems appropriate for the prevention or diminution of the relevant tax benefit. (c) treating parties who are connected persons in relation to each other as one and the same person; or (d) disregarding any accommo-dating party or treating any accommodating party and any other party as one and the same person; (e) deeming persons who are connected persons in relation to each other to be one and the same person; (f) re-allocating, amongst the parties to the arrangement,- (i) any accrual, or receipt, of a capital or revenue nature; or (ii) any expenditure, deduction, relief or rebate; (g) re-characterising- (i) any equity into debt or vice-versa; (ii) ....
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....f an arrangement as an impermissible avoidance arrangement shall apply. (7) No direction under sub-section (6) shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest of the revenue, as the case may be. (8) The Approving Panel may, before issuing any direction under sub-section (6),- (i) if it is of the opinion that any further inquiry in the matter is necessary, direct the Commissioner to make such further inquiry or cause to make such further inquiry to be made by any other income-tax authority and furnish a report containing the results of such inquiry to it; or (ii) call for and examine such records related to the matter as it deems fit; or (iii) require the assessee to furnish such document and evidence as it may so direct. (9) If the members of the Approving Panel differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members. (10) Every direction, issued by the Approving Panel under sub-section (6) or the Commissioner under sub-section (3), shal....
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....ngement as being an impermissible avoidance agreement or otherwise for the purposes of section 123. (3) Upon declaring an arrangement as an impermissible avoidance agreement, the Commissioner shall- (a) issue directions to the Assessing Officer to make such adjustment to them total income, or the tax liability, of the assessee; and (b) forward or cause to be forwarded a copy of such order- (i) to the assessee; and (ii) to the jurisdictional Commissioner of the other party to the arrangement, who shall then proceed under this section against such other party and the provisions of this section shall apply accordingly. (4) No order under sub-section (2) shall be issued after a period of twelve months from the end of the month in which the notice under sub-section (1) is issued. The Commissioner shall, for the purposes of determining the consequences under section 112, serve on the assessee a notice requiring him, on a date to be specified therein to produce, or cause to be produced, any evidence or particulars- (a) which may be required for the purposes of determining the consequences; or (b) on which the assessee may rely in support of his claim....
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.... carries on a business, if- (i) the person being an individual, or any relative of such person, has a substantial interest in the business of that other person; or (ii) the person being a company, firm, association of persons, body of individuals, whether incorporated or not, or a Hindu undivided family, or any director, partner or member of such company, firm or association of persons or body of individuals family, or any relative of such director, partner or member, has a substantial interest in the business of that other person; "associated person" in relation to a person, means- (a) any relative of the person, if the person is an individual; (b) any director of the company or any relative of such director, if the person is a company; (c) any participant in an unincorporated body or any relative of such participant, if the person is an unincorporated body; (d) any member of the Hindu undivided family or any relative of such member, if the person is a Hindu undivided family; (e) any individual who has a substantial interest in the business....
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....vidual, or any relative of such person, has a substantial interest in the business of that other person; or (ii) the person being a company, unincorporated body or Hindu undivided family, or any director, participant or member of such company, body or family, or any relative of such director, participant or member, has a substantial interest in the business of that other person; 8 "connected person" means any person who is connected directly or indirectly to another person and includes associated person "connected persons" includes associated persons; 9 "tax benefit" means- (a) a reduction or avoidance or deferral of tax or other amount payable under this Act; or (b) an increase in a refund of tax or other amount under this Act; or (c) a reduction or avoidance or deferral of tax or other amount that would be payable under this Act, as a result of a tax treaty; or (d) an increase in a refund of tax or other amount under this Act as a result of a tax treaty; or (e) a reduction in total income including increase in loss; in the relevant....
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.... of such business. "substantial interest in the business" - A person shall be deemed to have a substantial interest in the business, if,- (a) in a case where the business is carried on by a company, such person is, at any time during the financial year, the beneficial owner of equity shares carrying twenty per cent., or more, of the voting power; or (b) in any other case, such person is, at any time during the financial year, beneficially entitled to twenty per cent., or more, of the profits of such business. 11 "step" includes a measure or an action, particularly one of a series taken in order to deal with or achieve a particular thing or object in the arrangement 12 "benefit" includes a payment of any kind whether in tangible or intangible form; "benefit" includes a payment of any kind; "benefit" includes a payment of any kind; 13 Treaty Override Notwithstanding anything contained in sub-section (2) of Section 90, the provisions of Chapter X-A of the Act shall apply to the assessee, even if such provisions are not beneficial to him. Notes: i. In the a....
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....13th Aug. 12 5 p.m. Shri Yashwant Sinha Chairman, Parliamentary Standing Committee on Finance 6th Aug. 12 5.30 p.m. Shri Montek Singh Ahluwalia Deputy Chairman, Planning Commission. Annexe-3 Documents presented to GAAR Committee S.No. Letter/Slide/ Report Date Name of the representative Subject CHAMBERS OF COMMERCE AND INDUSTRY 1. Letter 02.08.2012 ASIFMA Application of indirect transfer taxation rules to portfolio investments. 2. Letter 02.08.2012 ASIFMA ASIFMA/CMTC Submission Letters - GAAR Guidelines - 6 August 2012 Meeting. 3. Letter 10.08.2012 ASIFMA ASIFMA/CMTC Submission letter - Indirect Transfer Taxation Rules : Application to Intra Group Restructuring. 4. Letter 07.08.2012 US India Business Council 5. Letter 11.08.2012 The Chamber of Tax Consultants Suggestions on Draft guidelines on GAAR. 6. Letter 14.08.2012 Dr. Arbind Prasad, Director General, FICCI Comments/Suggestions on Draft Guidelines on GAAR. 7. Letter 17.08.2012 International Chamber of Commerce Review of taxability of ‗indirect transfer'. 8.....
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....sset Management Association(efama) General Anti Avoidance Rules('GAAR') Guidelines -Perspective of the European Investment fund industry. 28. Report 31st July, 2012 CII CII Comments on Draft Guidelines on General Anti Avoidance Rules(GAAR) 29. Letter 23.07.2012 ASIFMA through PMO Certain amendments proposed in Finance bill dated 12/04/2012 TAX ADVISORY FIRMS 30. Letter 31.07.2012 PWC Recommendation on ^6Draft guidelines regarding implementation of GAAR in terms of section 101 of the IT Act, 1961. 31. Letter 10.08.2012 Ernst & Young Private equity/venture capital funds - comments/suggestions on draft guidelines for implementation of the GAAR. 32. Slide Ernst & Young Views on GAAR Guidelines. 33. Report August'12 Ernst & Young Memorandum on Draft GAAR Guidelines. 34. Report August'12 Ernst & Young Memorandum on Draft GAAR Guidelines. 35. Slide 17.08.2012 Ernst & Young Representation on retrospective amendments made by Finance Act 2012. 36. Slide August'12 Ernst & Young Views on Indirect transfer provisions. 37. ....
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....vernment Committee 55. Letter 20th July 2012 PWC Recommendation on draft GAAR Guidelines from the perspective of Asset Management industry 56. Letter CA Ankit Virendra Sudha Shah Note on First Draft Guidelines regarding implementation of GAAR - Comments/Suggestions 57. Letter Manvendra Goyal GAAR Comments on the Draft Guidelines. 58. Letter Niraj Shah Comments 59. Letter Poornima Mepani Comments 60. Letter S.G.Bhokarikar Comments 61. Letter Swami Sharan Verma Comments 62. Letter Manish Agarwal Comments 63. Slide KPMG Representation on Draft Guidelines on GAAR 64. Report KPMG Comments/Suggestions on Draft Guidelines on GAAR 65. Letter 17.08.2012 PWC Potential impact of the provisions of the Finance Act, 2012 relating to tax on offshore transfers in the context of the Financial Services Sector. 66. Letter BMR BMR Recommendations on the draft guidelines on GAAR 67. Letter BMR & Associates....
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.... J.K.Batra Comments on the Draft Report of the Expert Committee on GAAR. 21 E-mail 15.09.2012 Mukesh Bhutani BMR Recommendations on the revised GAAR guidelines issued on September 1, 2012 by the Expert Committee. 22 E-mail 15.09.2012 S. Saini Our comments and suggestions on the draft report of the GAAR Expert Committee. 23 E-mail 15.09.2012 Chiranjib Das Comments on GAAR Committee Report. 24 E-mail 15.09.2012 Ankit Shah Supplementary 1- Comments on GAAR committee - Request for relaxation for sometime to provide feedback. 25 Letter 15.09.2012 Dr. Arbind Prasad, FICCI Comments on the draft report of the Expert Committee on GAAR. 26 E-mail 17.09.2012 Kunal Karnani Comments on Shome Committee Report. 27 E-mail 17.09.2012 Gaurav Goel PWC Representation on GAAR. 28 Letter 17.09.2012 Rishi Harlalka Comments and suggestions on the GAAR Draft Report of the Committee. 29 Letter 17.09.2012 ASIFMA ASIFMA/CMTC Submissions letters: GAAR Guidelines-Draft report of the Expert Committee. 30 E-mail 18.09.2012 Sage, William Expert Committee on GAAR: ....
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....iting perceived shortcomings in the provisions of the Acts. Abnormal arrangements and abnormal features 6. (1) For the purposes of this Part an "abnormal arrangement" is an arrangement which, considered objectively - (a) viewed as a whole, and having regard to all the circumstances, has no significant purpose apart from achieving an abusive tax result (so that in the context of such an arrangement all of its features shall be regarded as abnormal); or (b) has features which would not be in the arrangement if it did not also have as its sole purpose, or as one of its main purposes, achieving an abusive tax result. The features are - (a) that the arrangement would, apart from the operation of this Part, result in receipts being taken into account for tax purposes which are significantly less than the true economic income, profit or gain; (b) that the arrangement would, apart from the operation of this Part, result in deductions being taken into account for tax purposes which are significantly greater than the true economic cost or loss; (c) that the arrangement includes a transaction....
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....ing that, given expected complexity, unanimous agreement on reasonableness of a transaction may be difficult to arrive at. If so, the appellate authority would come in. The second safeguard protects arrangements that were not conceived solely for tax benefit and requires the beneficiary to prove that the transaction was not planned or designed solely for a favourable tax outcome. The Indian draft GAAR proposes that a transaction could become an impermissible avoidance arrangement even if a step in it benefits the taxpayer. This overarching Indian provision conveys a contrary position to the first UK safeguard that seems to limit the scope of GAAR; and the second safeguard is also milder than the implications of the Indian provision. The third safeguard requires HMRC to prove that the transaction is not protected by the first two safeguards. This locks HMRC from using GAAR for a revenue objective. Only highly artificial tax avoidance schemes are to be targeted. This contrasts with the Indian presumption of an underlying tax benefit where the burden of proof lay on the taxpayer until a subsequent explanation was provided, indicating that the onus of proof was on the Revenue. ....
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....atter 6 (above) of the scheme having been entered into or carried out; and 8. the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in matter 6. Answering this purpose question will generally be the most critical step in determining whether Part IVA applies. United States^10 There is no provision like GAAR in the US statutes. US courts have applied five main common law doctrines to deny taxpayers desired tax benefits, i.e. (1) "economic substance"; (2) "substance over form"; (3) "step transaction"; (4) "business purpose"; and (5) "sham transaction". On 30 March 2010, the "economic substance doctrine" was codified in US law through insertion of section 7701(o) in the Internal Revenue Code (IRC). The economic substance doctrine applies to transactions entered into after 31 March 2010. The relevant part is reproduced as under- "(1) Application of Doctrine - in the case of any transaction to which economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if - (A) the transaction changes in a meaningful way (apart from....
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....her amount payable or an increase in a refund of tax or other amount under the Act. Sub-section 245(4) provides that the rule in subsection (2) does not apply to a transaction where it may reasonably be considered that the transaction would not result directly or indirectly in a misuse of the provisions of the Act or an abuse having regard to the provisions of the Act read as a whole. Thus, in Canada the GAAR provisions are applied to a transaction which results into a tax benefit to a party, unless the transaction is carried out for bona fide purposes or it is not a misuse of the provisions of the Act. Nevertheless, such application has been very selective, being ......... over a period of ........years ( from 200 .. to 2011). South Africa In 2006, the Income Tax Act, 1962 was amended to introduce the general anti-avoidance rule (GAAR) which applies to "impermissible avoidance arrangements". Four requirements have to be fulfilled in order for GAAR to apply, namely- (i) the existence of an arrangement; (ii) the existence of a tax benefit (that is, an arrangement resulting in a tax benefit); (iii) the sole or main purpose of the avoidance ar....
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.... (iv) Section 93- Avoidance of Income-tax by transfer of income to non-residents through transfer of assets, rights or interest. (v) Section 94- Avoidance of tax by certain transactions in securities. (vi) Section 94A- Transactions with persons located in notified jurisdictions. (vii) Section 2(22)(e)- Deemed dividend. (viii) 40(a)(i) and (ia)- Disallowance of expenses for non deduction of tax at source. (ix) Section 9- Scope of - "income deemed to accrue or arise in India". Vide the Finance Act, 2012 its scope has been widened to overturn the Supreme Court's ruling in Vodafone and some other cases. (x) Section 43(1)- Explanations 1 to 13- Determination of actual cost of assets ignoring agreements etc. in certain cases. Tax treaties also provide certain anti-avoidance rules which may be considered to be SAAR. For instance, Limitation of Benefit (LOB) Clause and concept of beneficial ownership. Annexe-6 Tax Rate on Capital Gains ASIA PACIFIC Australia 0% Hong Kong 0% Indonesia 0% Japan 0% Korea 0% Malaysia 0% New Zealand 0% Singapore 0% Taiwan 0% Chin....
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....ME TAX ACT, 1961 1 Name and Address of the Assessee 2 PAN 3 Status 4 Particulars of Assessing Officer 5 Assessment year(s) in respect of which the proceedings u/s 144BA (1) are proposed to be invoked : (a) Assessment Years pending in scrutiny (b) Other assessment years proposed to be covered 6 Provide a factual matrix of the "arrangement" entered into by the assessee 7 Is there any "Tax Benefit" as defined in section 102(11) ? 8 If yes, provide the approximate quantum thereof assessment year wise. 9 Is "Tax Benefit" the "main purpose" or one of the "main purposes" of the "arrangement"? 10 Brief facts of the "Tax Benefit" 11 Has the assessee been confronted with the details of the "Tax Benefit"? If yes, provide the gist of the reply furnished by the assessee on "Tax Benefit" 12 If "Tax Benefit" is the "main purpose" or one of the "main purposes" specify which other condition, out of the following is satisfied giving details how the conclusion has been arrived at: ....
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....sp; 14 Brief facts of the "Tax Benefit" 15 Has the assessee been confronted with the details of the "Tax Benefit" ? If yes, provide the gist of the reply furnished by the assessee on "Tax Benefit" 16 If "Tax Benefit" is the "main purpose" or one of the "main purposes" specify which other condition, out of the following is satisfied giving details how the conclusion has been arrived at: (a) Creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length; (b) Results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act; (c) Lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or (d) Is entered into, or carried out, by means, or in manner, which are not ordinarily employed for bona fide purposes. 17 Has the assessee been confronted with the findings given in column 16? If yes, provide the gist of the reply furnished by the assessee. 18 Detailed reasons for treating the arrangement as "Impermissible Avoidance arrangement". ....