The Finance Bill 2012 proposes to introduce a Chapter X-A to the Current Income-tax Act, 1961 on General Anti-avoidance Rules (GAAR)

GAAR seeks to provide wide discretionary powers to the revenue authorities in taxing impermissible avoidance arrangements‟ including the power to disregard entities in a structure, reallocate income and expenditure between parties to the arrangement, alter the tax residence of such entities and the legal situs of assets involved, treat debt as equity and vice versa, etc. By doing so, the revenue authorities may deny tax benefits even if conferred under a tax treaty.

An impermissible avoidance arrangement‟ is defined as an arrangement where the main purpose (or one of the main purpose) is to obtain a tax benefit and which contains any of the following elements:

a. Non-arm‟s length transactions:

b. Misuse or abuse of the Act: However, the Budget does not provide any clarity on what will constitute a misuse or abuse.

c. Non - bona fide purpose:

d. Lack of commercial substance: For eg. Arrangements that include round trip financing involving transfer of funds between parties without any substantial commercial purpose. Arrangements are also deemed to lack commercial substance if the location of assets, place of transaction or the residence of parties does not have any substantial commercial purpose.

Furthermore, it has been provided by the provisions of GAAR that the reason that a structure provides an exit route would not be considered in determining commercial substance. This is in contrast to what was held in Vodafone Judgment.

The AO has been given the power to make a reference to the CIT (ref.Sec.144 BA) for invoking GAAR and make determination of a transaction as an impermissible avoidance arrangement. If objections of taxpayer received and not construed as tenable, the CIT shall refer the matter to an Approving Panel post hearing the taxpayer in a time bound manner (six months as stipulated).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.