GAAR from April 1, taxes to be invoked in uniform, fair and rational manner: CBDT

30 Jan 2017 Evaluate

In a bid to address investors’ concerns ahead of General Anti-Avoidance Rules (GAAR) implementation from April 1, 2017, the tax department has said that its provisions which will be effective from assessment year 2018-19, shall not be invoked merely on the ground that the entity is located in a tax efficient jurisdiction. It also said that the rules will not be invoked if the jurisdiction is finalized based on non-tax commercial considerations and if the main purpose of the arrangement is not to obtain tax benefit.

In clarification on implementation of GAAR, the Central Board of Direct Taxes (CBDT) said that adequate procedural safeguards are in place to ensure that GAAR, which seeks to prevent companies from routing transactions through other countries to avoid taxes, are invoked in a uniform, fair and rational manner. It can be invoked only through a two-stage process involving a nod at the level of principal commissioner of income tax and a panel headed by a high court judge. The new rules give tax authorities the right to scrutinize and tax transactions which they believe are structured solely to avoid taxes. But it will not interplay with the right of the taxpayer to select or choose method of implementing a transaction.

Also, CBDT clarified that if the jurisdiction of FPI is finalized based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, GAAR will not apply. GAAR will not interplay with the right of the taxpayer to select or choose method of implementing a transaction. CBDT said that the provisions will not apply if the tax benefits obtained are permissible under the limitation of benefits clause provided in tax treaties. Investments made by way of convertible instruments, bonus issuances or split/consolidation of holdings prior to April 1 will be grandfathered. CBDT added that adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies and they are required to be tackled through domestic anti-avoidance rules. However, if a case of avoidance is sufficiently addressed by Limitation of Benefits (LoB) provisions in the tax treaty, there shall not be an occasion to invoke GAAR.

Further, it said that the proposal to apply GAAR will be vetted first by the Principal Commissioner of I-T/Commissioner of I-T and at the second stage by an Approving Panel headed by a judge of High Court. It also said that the stakeholders have been assured that adequate procedural safeguards are in place to ensure that GAAR is invoked in a uniform, fair and rational manner and added that the government is committed to providing certainty and clarity in tax rules.

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