India: India's Tax Regulator Issues Clarifications Regarding The Implementation Of The GAAR Provisions

Last Updated: 15 February 2017
Article by Shashwat Sharma and Ashish Sodhani

Recently, the Central Board of Direct Taxes ("CBDT") released a circular1 ("Circular") providing clarifications on implementation of General Anti-Avoidance Rules ("GAAR"). The Circular provides responses to queries raised by various stakeholders in the context of the applicability of GAAR.

Background

The GAAR provisions, which were introduced in the ITA by the Finance Act, 2012, are slated to come into force from April 1, 2017. GAAR confers broad powers on the tax authorities to deny tax benefits (including tax benefits applicable under tax treaties), if the tax benefits arise from arrangements that are 'impermissible avoidance arrangements'

An 'impermissible avoidance arrangement' is an arrangement entered into with the main purpose of obtaining a tax benefit and satisfying one or more of the following: (a) non-arm's length dealings; (b) misuse or abuse of the provisions of the domestic income tax provisions; (c) lack of commercial substance2; and (d) arrangement similar to that employed for non-bona fide purposes.

The CBDT had issued rules, necessary procedures for application of GAAR and conditions under which it shall not apply. These have been enumerated in the Income Tax Rules, 1962 ("ITR") ( Click here for our hotline with insights and analysis of the GAAR Rules that were notified.). The wide-scope of these GAAR provisions and the broad powers conferred upon the tax authorities evoked considerable concern among various stakeholders such as offshore funds, FPIs, legal practitioners, etc. This led to the Central Government appoint an Expert Committee under the renowned economist Dr. Parthasarthy Shome to consult with stakeholders and review GAAR. In its detailed report, the Expert Committee had recommended a substantial narrowing down of the scope of GAAR and other protections in the interest of fairness and certainty. On the recommendation of the Shome Committee these provisions were deferred and the GAAR provisions were redrafted to address the concerns of stakeholders such as various industry bodies, investors, etc. After being deferred again in 2015, the GAAR provisions are finally set to come into force from April 1, 2017.

The Circular

Last year, the CBDT issued a press release3, inviting comments and input from the general public and stakeholders on the provisions of GAAR in respect of which greater clarity was sought. A working group was constituted by the CBDT in June, 2016 to address the queries/comments so received. The Circular, which has been issued by CBDT after considering the comments of this working group, addresses some of the most practical concerns raised by stakeholders.

GAAR v. SAAR

The Circular clarifies that since Special Anti-Avoidance Rules ("SAAR") may be inadequate to address all situations of tax abuse, invocation to GAAR provisions may be resorted to even in cases were SAAR provisions exist. The same logic has been extended to the application of GAAR to arrangements which are covered under India's Double Taxation Avoidance Agreement ("DTAA") which include a Limitation of Benefits ("LOB") clause as an anti-avoidance measure. The CBDT has expressed its view that there may be cases where the LOB may not be address all tax avoidance strategies and in such a case, it would be open to the Indian tax authorities to apply the GAAR provisions. In situations when the anti-abuse is sufficiently addressed by the LOB provision in the DTAA, GAAR shall not apply. However, what the standard for the LOB to be sufficiently addressed is not provided and may result in additional complexities.

The CBDT has further clarified that the GAAR provisions will not interfere with the right of the taxpayer to select or choose a method of implementing a transaction/ arrangement.

Main Purpose test to be adopted while considering the choice of residence of FPIs

In a significant confirmation, the CBDT has clarified that where a FPI is located in a particular jurisdiction based on non-tax commercial reasons and the main purpose of the choice of location/residence of the FPI is not to obtain a treaty benefit, the GAAR provisions will not be resorted to by the tax authorities. The CBDT has clarified that the choice of the entity, location, etc. decided upon by the FPI would be considered on the basis of the main purpose and other conditions which are mentioned in Section 96 of the ITA.4

Grandfathering of convertible instruments/securities

It has been clarified that any shares which result from the conversion of any compulsorily convertible instrument, at the terms finalized at the time of issue of such instruments, which had been acquired prior to April 1, 2017 will be eligible for the benefit of the grandfathering of investments provided under Rule 10U(1)(d) of the ITR. Further, shares which come into existence as a result of a split or consolidation of share capital or any bonus issue will also be extended this benefit of the grandfathering. This is especially welcoming as it brings the much needed clarity on the treatment of convertible instruments which continues to be ambiguous under the India-Mauritius treaty.

The CBDT, relying upon the definition of "investments" provided under the Accounting Standards, has expressed its view that lease contracts and loan agreements should not be characterized as "investments" and consequently, should not qualify for the benefit of grandfathering. This may be worrisome for certain stakeholders such as the aviation industry where sale and lease back of aircraft is very common.

The Circular also clarifies that where the Authority for Advance Ruling ("AAR") has ruled that an arrangement is permissible the income tax authorities will be barred from invoking the GAAR provisions with respect to such arrangement.

Two-Tier Vetting of Arrangements

To ensure that there is no indiscriminate application of GAAR by the tax authorities, a two-tier vetting process is proposed to be put into place. Under this process, where any proposal is made to treat an arrangement as an impermissible avoidance arrangement, such a proposal will be vetted by the Principal Commissioner/Commissioner of Income Tax and subsequently by an Approving Panel which will be headed by a High Court judge.

It has been confirmed that where an arrangement goes through the two-step vetting process and is adjudged as being a permissible arrangement in any given assessment year, it will not be open to the tax authorities to treat the same arrangement as an impermissible avoidance arrangement in subsequent assessment years. This clarification should being great comfort to taxpayers as tax authorities often resort to an adversarial approach in different assessment years, even in cases where a taxpayer has obtained a favourable order from a competent court such as the ITAT or a High Court in support of its stand in an earlier assessment year.

Mergers / Demergers and re-structuring

Mergers or demergers in India are usually undertaken through a court appointed process. It has been clarified that where any court or authority such as the National Company Law Tribunal ("NCLT") has "explicitly and adequately" considered the tax implication of an arrangement, GAAR will not apply to such an arrangement. While this is welcome clarification the wording of the same may be problematic. For instance, it is possible that in case of a merger, the NCLT does not explicitly opine on the tax implications while granting its sanction to a scheme of amalgamation. Under Section 230(5) of the Companies Act, 2013, a copy of the scheme of merger is required to be sent to various authorities such as RBI, SEB, etc., including the tax authorities. These authorities are required to raise objections/give their comments on the merger scheme within 30 days. In case the tax authorities do not raise objections during this period, it should not be open to them to invoke the GAAR provisions to deny the benefits of the merger/arrangement to taxpayers on the ground that the NCLT did not explicitly deal with the tax implications of the merger.

No exemption to long-standing structures

The CBDT has declined requests to exempt structures which have been in existence for a time period fixed by the CBDT from the applicability of GAAR provisions.

Adjustment in hands of other participants

CBDT has refused to allow corresponding adjustments in the hands of other participant(s) in an arrangement/ transaction which is declared as an impermissible avoidance arrangement and a participant is made the subject matter of the GAAR provisions. The rationale offered by CDBT for this decision is based on its view that the GAAR provisions are meant to deter tax avoidance and allowing corresponding tax adjustments in the hands of other participants in an impermissible avoidance arrangement will dilute the deterrence value of these provisions.

Scope of Review under GAAR

The CBDT has rejected requests to extend the scope of review under the GAAR provisions to other territories and other parties involved in the arrangement under scrutiny. On the contrary it has stated that it considers GAAR to be specific to the Indian tax benefit enjoyed by a taxpayer as a result of the arrangement and the assessment year in question.

Penalty

A request had been made to that no penalty proceeding be initiated against any taxpayer who is considered to have participated in any impermissible avoidance arrangement for an initial period of 5 years. The CBDT has declined this request and has confirmed that since the levy of penalty is a fact specific consideration, no blanket exemption will be made available to taxpayers in this regard.

Conclusion

Given that GAAR is slated to come into effect from April 1, 2017 it was high time that the Government issued clarifications on its implementation. However, even after providing these clarifications, it still remains unclear as to how GAAR will be practically implemented. Further, even these clarifications do not provide relief to the anxiety caused by GAAR being introduced.

As stated earlier, by using phrases such as 'sufficiently addressed' and not explaining what it actually means, the CBDT has caused more confusion on situations when even if there is an LOB in a treaty, whether GAAR will apply or not apply. Further, the Multilateral Instrument ("MLI") recently released by the OECD as part of its project on Base Erosion and Profit Shifting ("BEPS"), provides that as a minimum standard, countries should implement at least one of the following measures in its treaties – (i) a principal purpose test ("PPT") only, which is a general anti-abuse rule based on the principal purpose of transactions or arrangements (ii) a PPT supplemented with either a simplified or a detailed LOB provision, or (iii) a detailed LOB provision, supplemented by a mechanism to deal with conduit arrangements not already dealt with in tax treaties. Consequently, given its enabling nature and flexible form, the MLI provides various alternatives in its provisions concerning treaty abuse and limitation of benefits. Signatories to the convention may elect to opt in any of these alternatives in respect of their tax treaties. In this context, it would be interesting to see if such principal purpose test 'sufficiently addresses' the abuse as envisaged by GAAR, and whether GAAR would still be applicable to the transaction.

Footnotes

1 Circular No. 7 of 2017.

2 As per Section 97 of the ITA, an arrangement is deemed to lack commercial substance, in case (a) 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; (b) it involves or include round trip financing, an accommodating party, elements that have effect of offsetting or cancelling each other; or a 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; (c) 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; or (d) it does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any tax benefit.

3 CBDT Press Release No. F No 370149/89/2016-TPL dated May 27, 2016.

4 Section 96(1): An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it—

  1. creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length;
  2. results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;
  3. lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or
  4. is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Shashwat Sharma
Ashish Sodhani
Similar Articles
Relevancy Powered by MondaqAI
Krishnomics Legal
SKP Business Consulting LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Krishnomics Legal
SKP Business Consulting LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions