General Anti-Avoidance Rule (GAAR) : Introduction
Evolution of General Anti-Avoidance Rule (GAAR) In India
Chapter - XA of the Income Tax Act, 1961, contains an anti-tax avoidance law which is referred to as General Anti-Avoidance Rule (herein referred to as ‘GAAR’). The Government of Indiawith the target to curb the arrangements/ transactions which are/were entered into or made specifically to avoid taxes, proposed the provisions of GAAR in the Direct Tax Code 2009. GAAR provisions were also present in the Direct Tax Code 2010 and Direct Tax Code 2013. GAAR was one of the prime salient features of the Direct Tax Code(s) among several others.
The Direct Tax Code(s) so proposed were never implemented in India. The first draft Direct Taxes Code Bill was released on August 12, 2009, and then a Revised Discussion Paper (RDP) was in 2010.DTC 2010 was introduced in Parliament and the government formed a Standing Committee of Finance (SCF) to discuss it with various stakeholders. The SCF submitted its report to Parliament in 2012. The government took into account the recommendations of the SCF and a 'revised' version of DTC was released in 2014. However, it lapsed when the NDA government came to power that year.
Meanwhile, GAAR was introduced in India by then Finance Minister, Sh. Pranab Mukherjee, on 16 March 2012 during the Budget session introduced vide Finance Act, 2012. However, it was considered controversial because it had provisions to seek taxes from past overseas deals involving local assets retrospectively.
During the 2015 Budget presentation, Finance Minister, Sh. ArunJaitley, announced that its implementation will be delayed by 2 years. GAAR is finally applicable from assessment year 2018-19.
GAAR and Arrangements
As per section 95(1) of the Income Tax Act, 1961, an arrangement entered into by the assessee may be declared to be an impermissible avoidance arrangement and the consequences in relation to tax arising therefrom may be determined. Meaning thereby,any agreement, arrangement or transaction entered into by an assessee can be declared as impermissible avoidance arrangement by the department, if it falls within the ambit of one, and once the same is classified as impressible avoidance arrangement the tax implication arising therefrom may be levied upon the assessee or parties to such arrangement, agreement or transaction.
An arrangement means a part or whole of any type of transaction, operation, scheme, agreement or understanding. The legal enforceability of the arrangement is not mandatory. An arrangement also includes the alienation of any property in such transaction, operation, scheme, agreement or understanding.
Impermissible Avoidance Arrangement
An Impermissible avoidance arrangement is one that is purposefully designed by the parties/ entities to avoid the tax and such arrangements attract general anti-avoidance measures. An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain tax benefit and it has either of following:
(a) Rights or obligations are created which will not normally be created between persons dealing at arm's length.
(b) It results in the misuse or abuseof the provisions of the Income Tax Act, 1961.
(c) It lacks commercial substance in whole or in part.
(d) It is entered into in a manner which would not normally be employed for bona fide purposes.
The burden to prove that, the arrangement is not an ‘impermissible avoidance arrangement’, lies on the head of the assessee. The whole arrangement will be presumed to be entered into for the purpose of avoiding tax, even if any part of such arrangement is to obtain tax benefit and not the whole arrangement.
Process of Approval for GAAR
Any transaction/ arrangement identified by the Assessing Officer to be falling under or covered by the definition of “Impermissible Avoidance Arrangement”; would require prior approval of “Approving Panel (AP)” before declaring or passing order to such effect. In case the assessee or assessing officer is aggrieved by the order of Approving Panel, the appeal may be filed before The Income Tax Appellate Tribunal. The process of approval is as under:
Lacking Commercial Substance
An arrangement shall be deemed to lack commercial substance, if any of the following condition is satisfied:
Condition 1: 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.
Condition 2: It involves or includes, round tripping finance, an accommodating party, elements that have effect of offsetting or cancelling each other or any 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
Condition 3: It involves the location of an asset or of a transaction or of the place of residence of any party which is without any substantial commercial purpose other than obtaining a tax benefit for a party.
Condition 4: 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.