Draft Guidelines for GAAR
CBDT had constituted a Committee to give recommendations for formulating the guidelines for proper implementation of General Anti Avoidance Rules (GAAR) and to suggest safeguards to these provisions to curb the abuse thereof. The Committee has made several important recommendations.
1. Monetary threshold: in order to avoid the indiscriminate application of the GAAR provisions and to provide relief to small taxpayers, there should be monetary threshold for invoking the GAAR provisions. But the Committee has not suggested the threshold limit
2. Time Limit: It may be prescribed that in terms of section 144BA(4), the CIT should make a reference to the Approving Panel within 60 days of the receipt of the objection from the assessee and in case of the CIT accepting the assessee's objection and being satisfied that provision of chapter X-A are not applicable, the CIT shall communicate his decision to the AO within 60 days of the receipt of the assessee's objection as prescribed under section 144BA(4) r.w.s. 144BA(5). No action u/s 144BA(4) or (5) shall be taken by the Commissioner after the period of six months from the end of the month in which the reference under sub-section 144BA(1) was received by the Commissioner.
3. Approving Panel:
a. To begin with, there should be one Approving Panel, which shall be situated at Delhi. Subsequently, the CBDT should review the number of approving Panels required on the basis of the workload in the FY 2014-15
b. The Approving Panel should comprise of three members, out of which, two members should be of the level of Chief Commissioners 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 Approving Panel should be provided the secretariat staff along with appropriate budgetary and infrastructure support by the CBDT. The secretariat should be headed by an officer of the level of Joint/Additional Commissioner of Income Tax.
4. Special provisions for Foreign Institutional Investors (FII's)
Where a Foreign Institutional Investor (FII) chooses 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.
5. Clarity regarding retrospective/prospective operations of the GAAR provisions: The provisions of GAAR will apply to the income accruing or arising to the taxpayers on or after 01.04.2013.
6. Interplay between Specific Anti-Avoidance Rules (SAAR) and General Anti Avoidance Rules (GAAR).
While SAARs are promulgated to counter a specific abusive behavior, GAARs are used to support SAARs and to cover transactions that are not covered by SAARs. Under normal circumstances, where specific SAAR is applicable, GAAR will not be invoked. However, in an exceptional case of abusive behavior on the part of a taxpayer that might defeat a SAAR, GAAR could also be invoked.
GAAR provisions:
1. The provisions relating to GAAR appear in Chapter X-A (sections 95 to 102) of the Act. The provisions allow the tax authority to, notwithstanding anything contained in the Act, declare an ‘arrangement' which the assessee has entered into, as an ‘impermissible avoidance arrangement'. Once an ‘arrangement' has been declared as an ‘impermissible avoidance arrangement', the consequence as regards the tax liability would also be determined.
2. The provisions give a wide definition of the term ‘arrangement'. An ‘arrangement' means any step in or a part or whole of any transaction, operation, scheme, agreement or understanding, whether enforceable or not. It also includes the alienation of any property in such a transaction etc. The onus of proving that there is an impermissible avoidance arrangement is on the Revenue.
3. An ‘arrangement' would be an ‘impermissible avoidance arrangement' if,
(a) its main purpose is to obtain a ‘tax benefit', and,
(b) it also has one of the following characteristics:
(i) it creates rights and obligations, which are not normally created between parties dealing at arm's length;
(ii) it results in misuse or abuse of the provisions of the tax law;
(iii) it lacks commercial substance;
(iv) it is carried out by means or in a manner which is normally not employed for an authentic (bona fide) purpose.
A ‘tax benefit' has been defined to mean
(i) a reduction or avoidance or deferral of tax or other amount payable under the Act or as a result of a tax treaty;
(ii) an increase in a refund of tax or other amount that would be payable under the Act or as a result of tax treaty; or
(iii) a reduction in total income including an increase in loss.
4. The onus of proving that
(A) there is an arrangement,
(B) the arrangement leads to a ‘tax benefit',
(C) the main purpose or one of the main purposes of the ‘arrangement' is to obtain a ‘tax benefit', and
(D) the arrangement has one of the characteristics listed at (i) to (iv) at (b) of 3 above
is on the revenue.