General Anti-Avoidance Rules – Advanced Tax Laws and Practice Important Questions
Question 1.
What is General Anti Avoidance Rules ‘GAAR’ and its applicability?
Answer:
GAAR refers to General Anti-Avoidance Rules. These rules target any trans-action or business arrangement that is entered into with the objective of avoiding tax. The objective is to check aggressive tax planning.
It may be noted that the GAAR provisions would be applicable to all taxpayers irrespective of their residential or legal status {ie. resident or non-resident, corporate entity or non-corporate entity). The provisions also apply to all transactions and arrangements irrespective of their nature {ie. business or non-business) if, the tax benefit accrues to the taxpayer and he fails to establish that the main purpose of entering into that transaction/arrangement was not to obtain a tax benefit. For GAAR provisions, it is also not relevant whether transactions/arrangements are entered into with group concerns or third parties and whether they are domestic or cross-border transactions.
For calculation of threshold of INR 30 million (that is, ₹ 3 Crores as per the Rules), only the tax benefit enjoyed in Indian jurisdiction due to the arrangement or part of the arrangement is to be considered. Such benefit is assessment year specific. GAAR is with respect to an arrangement or part of the arrangement and a limit of INR 30 million cannot be read in respect of a single taxpayer only.
Question 2.
What is the Implication of GAAR implementation?
Answer:
The implication of GAAR is that the Income-tax department will have powers to deny tax benefits if a transaction was carried out exclusively for the purpose of avoiding tax. For example, if an entity is set up in Mauritius with the sole intention of claiming exemption from the capital gains tax, the tax authorities have the right to deny the claim for exemption provided under the India-Mauritius tax treaty.
Question 3.
When can an arrangement be declared as an Impermissible Avoidance Arrangement (IAA)?
Answer:
The Income-tax Commissioner will be empowered to declare an arrangement as an Impermissible Avoidance Arrangement (IAA) if:
- creates rights, our obligations, which are not ordinarily created between S persons dealing at arm’s length;
- results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;
- lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or
- is entered into, or carried out, by means, or in a manner, which is not ordinarily employed for bona fide purposes.
This is so far-reaching in nature that almost each and every transaction, which results in saving tax could be regarded as an IAA. This means that GAAR enables tax authorities to declare any arrange¬ment entered into by a taxpayer as an IAA. If it is so declared, then the tax authorities can disregard, combine or re-characterize any step of such arrangement or the entire arrangement, disregard any accommodating party involved in such arrangement, treat the transaction as if it had not been entered into or carried out, reallocate any income or expenditure, look through any arrangement by disregarding any corporate structure, re-characterize debt as equity or vice versa and so on.
In effect, for tax purposes, any transaction can be treated in a manner different from the manner in which it is carried out if it is regarded as an IAA.
Question 4.
What is Round Trip Financing?
Answer:
Section 97(2) of the Income-tax Act defines round trip financing to include any arrangement in which, through a series of transactions, funds are transferred among the 47 parties to the arrangement and such transactions do not have any substantial commercial purpose other than obtaining the tax benefit.
Question 5.
What are exclusions from GAAR?
Answer:
Exclusions from GAAR
Rule 10U of the Income-tax Rules provides for certain exclusions from the provisions of GAAR, which are discussed below:
(1) Monetary Threshold: As discussed above, there is a monetary thresh¬old of INR 3 crores for the applicability of GAAR. The threshold has to be seen with respect to each assessment year. Also, the threshold is not taxpayer-specific and it has to be determined with regard to all the parties to the arrangement.
(2) Exemption to Foreign Institutional Investors (FII) and Foreign Portfo¬lio Investors: The Rules provide that the provisions of GAAR are not applicable to an FII.
(3) Exclusion for P-Notes/Investments in Fils: The provisions of GAAR shall not apply to a person who is a non-resident in relation to investment made by him by way of offshore derivative instruments or otherwise, directly or indirectly in an FII. The term ‘offshore derivative instruments’ mainly indicates investments made by way of P-Notes. Further, there is no threshold in respect of this investment. Even de minimis stakes are grandfathered by this clause.
Question 6.
Discuss in brief some distinguishing features of General Anti-Avoid-ance Rules (GAAR) and Specific Anti-Avoidance Rules (SAAR).
Answer:
Distinguishing features of General Anti Avoidance Rules (GAAR)
- These involve necessarily granting the discretion to the tax authorities to invalidate the arrangements as impermissible tax avoidance.
- They have a far broader application and are hence interpreted in a more extensive manner.
- GAAR has the potential to counter more effectively and outsmart the taxpayers in their “out-of-box thinking” and their approach in devising new means of tax avoidance.
Distinguishing features of Specific Anti Avoidance Rules (SAAR)
- These are specific and help reduce the time and cost involved in tax litigation.
- These provide certainty to any taxpayer while formalizing specific arrangements.
- These don’t provide any discretion to the tax authorities.
- There is always a possibility that the taxpayer may find loopholes and circumvent the limited applications of specific provisions.
Question 7.
ABC Ltd. has 2 factories one of which is in SEZ, Company moves the produce of the non-SEZ factory at a price considerably lower than the fair market value to the SEZ factory. This lowers the cost of production of the SEZ factory and the goods are sold from therein after insignificant value addition. Consequently, the SEZ factory shows higher profits and that entitles the assessee to claim a higher deduction from the computation of income. Can General Anti Avoidance Rules ‘GAAR’ specified under the Income-tax Act, 1961 be invoked in this case?
Answer:
There is no misrepresentation of facts in the situation given in the question and hence there is no tax evasion. In the given case, ABC Ltd. has made to shift the profits from a taxable zone to a zone with tax benefits being SEZ and hence this would be dealt with by the transfer pricing regulation. Hence, GAAR will not be invoked in this case.
General Anti-Avoidance Rules Notes
- Need of GAAR
- Meaning of “Impermissible Avoidance Agreement”
- GAAR v/s SAAR ie. Specific Anti Avoidance Rules
- BEPS ie Base Erosion and Profit Sharing and GAAR
- Exclusions from GAAR