TaxTMI 
TaxTMI 
Statutory backbone of India's General Anti-Avoidance Rule (GAAR) : 180 of the Income Tax Bill, 2025 Vs. Section 97 of the Income-tax Act, 1961
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....on 97 as currently enacted under the Income-tax Act, 1961. The analysis highlights both the continuity and evolution of anti-avoidance law in India, emphasizing the legal, practical, and policy dimensions of these provisions. Objective and Purpose The legislative intent behind both Clause 180 and Section 97 is clear: to empower tax authorities to disregard arrangements that, while technically compliant with the letter of the law, are primarily or solely designed to secure a tax benefit without genuine commercial purpose. This objective is rooted in several policy considerations: * Protecting the Tax Base: By targeting arrangements that lack commercial substance, these provisions aim to safeguard government revenues from aggressive tax planning schemes that erode the tax base. * Ensuring Equity and Fairness: They promote fairness by preventing taxpayers from gaining an undue advantage through artificial or contrived transactions that are unavailable to the general body of taxpayers. * Aligning with International Norms: The adoption of substance-over-form principles is consistent with global trends, particularly the OECD's Base Erosion and Profit Shifting (BEPS) project, ....
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.... Residency Without Commercial Purpose: The provision targets arrangements involving the location of assets, transactions, or the residence of any party, where such choices lack substantial commercial purpose other than obtaining a tax benefit. This is aimed at countering treaty shopping, artificial relocation of assets, or shifting of tax residence to low-tax jurisdictions. * (d) No Significant Effect on Business Risks or Cash Flows: If an arrangement does not materially affect the business risks or net cash flows of any party, apart from the tax benefit, it may be deemed to lack commercial substance. This targets "paper" transactions that have no real-world impact except reducing tax liability. 2. Round Trip Financing: Expanded Definition Clause 180(2) and Section 97(2) provide a detailed explanation of "round trip financing." The essential elements are: * Funds are transferred among parties through a series of transactions. * These transactions lack any substantial commercial purpose other than obtaining a tax benefit. * Three factors are explicitly stated as irrelevant: * Whether the funds can be traced to particular transactions or parties. * The timing or seq....
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....tion found in Section 97(3). * Removal of "For the Removal of Doubts" Language: Section 97(4) explicitly states that certain factors are "clarified" as not sufficient, while Clause 180 simply lists them. This may have implications for interpretive certainty. * Minor Linguistic Updates: The 2025 Bill uses more streamlined language, possibly to enhance readability and modernize the statute. Practical Implications The practical impact of these provisions is profound, affecting taxpayers, tax authorities, and advisors alike: * For Taxpayers: Taxpayers must ensure that their transactions have genuine commercial rationale beyond mere tax savings. Documentation, business purpose, and economic substance become critical. Aggressive tax planning involving circular transactions, artificial parties, or paper arrangements is likely to attract scrutiny under GAAR. * For Tax Authorities: These provisions provide a robust legal framework to challenge and disregard tax avoidance schemes. However, authorities must exercise this power judiciously, substantiating their claims with evidence of lack of commercial substance. The risk of litigation and the need for detailed analysis of facts....
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....terpretation u/s 97, Indian courts and tribunals have begun to develop jurisprudence around the meaning of "commercial substance," often referencing international case law and principles. The continuity in language ensures that this body of interpretation can be carried forward under Clause 180, though the omission of certain definitions may necessitate judicial clarification. 5. Prospective Application and Transitional Issues The transition from Section 97 to Clause 180 (assuming passage of the 2025 Bill) raises questions about the treatment of pre-existing arrangements and the application of judicial precedents. Generally, unless the new provision is expressly retrospective, it will apply prospectively. However, the similarity in language should facilitate a smooth transition in both administration and adjudication. Practical Implications (A) For Taxpayers * Taxpayers must ensure that their arrangements have a genuine, demonstrable commercial purpose beyond tax savings. * Structures involving round tripping, accommodating parties, or artificial layering are likely to attract scrutiny. * Documentation and evidence of business rationale, risk assumption, and economic eff....