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GAAR: A Paradigm Shift in Approach


This article has been republished in Thomson Reuters WTE Practical International Tax Strategies, 15 November 2012

The Indian Budget 2012 introduced General Anti-Avoidance Rules (GAAR) in the income tax laws to take effect from 1 April, 2013. The statutory provisions also envisaged detailed guidelines to be issued for implementation of GAAR provisions. The draft guidelines, which were issued in June 2012 (initial guidelines), evoked strong reactions from taxpayers, both multinationals and the Indian business community. The provisions and the initial guidelines were severely criticised for their scope, lack of clarity, uncertainty and inadequate safeguards to prevent indiscriminate invocation.

This widespread outcry and the negative sentiment created in the international investing community, led to the establishment of a new committee (Committee) by the Prime Minister to review the initial guidelines, taking into account comments and suggestions from the various stakeholders. The Committee has issued its draft recommendations (revised guidelines) for further debate before finalisation. The revised guidelines represent a sea change in the thought process and mindset for implementation of GAAR. Taxand India explores the shift in approach towards GAAR and the effect that this shift could have on multinationals with an interest in India.

The revised guidelines recommend deferring the implementation of GAAR by a period of three years (to take effect from 1 April, 2016). This will enable tax payers to understand and prepare for the new regime. The Committee has taken note of the GAAR-related developments in UK and the existing practices in Australia, Canada, South Africa and United States.

The most significant aspect is the clarification of the overarching principle that not every tax benefits or that tax avoidance is amenable to GAAR. To invoke GAAR, the arrangement or transaction has to be artificial or abusive. GAAR is now seen to be a deterrent and not as a means to enhance revenues.

There are several other significant recommendations. The applicability is to be restricted to cases where the main or dominant purpose is tax avoidance and not extended to cases where tax benefit may be one of the reasons. The Committee has made a clear distinction between tax evasion, tax mitigation and impermissible tax avoidance. It has been suggested that GAAR should apply only to the last category of arrangements, as tax evasion can be dealt with under the ordinary taxation principles itself. A negative list has been suggested which includes cases where the taxpayer chooses one option out of several offered by law. For instance, repatriation methods, decision on operating entity structures, choice between debt or equity, court approved schemes, intra group transactions not involving loss to revenue, etc are part of the negative list. It is suggested that GAAR should not apply where specific anti-avoidance rules apply or where transfer pricing regulations are applicable. Similarly, where tax treaties have the limitations of benefits (LOB) clause, GAAR would not be invoked.

The existing investments made through intermediate tax-friendly jurisdictions would not be impacted by GAAR. The Committee has specifically recommended that investments routed through entities having a valid tax residence from Mauritius should be protected until the beneficial circular issued by the Central Board of Direct Taxes (CBDT) is withdrawn. Similarly, investments through entities meeting the LOB conditions in Singapore would not be subject to GAAR.

It is suggested that when revoking GAAR-relevant factors, such as how long the arrangement lasts for, that the payment of taxes under the arrangement and the envisaged exit route should be considered - although these would not be conclusive factors.

The initial threshold for invocation of GAAR is recommended at a tax benefit of INR 30 million (approx. USD 600,000) in a year.

The revised guidelines have also suggested the abolition of gains on listed securities to boost foreign investment.

The revised guidelines also provide for correlative adjustments in the hands of the taxpayer where GAAR is invoked, and has also provided clarity on how GAAR will be dealt with at the stage of tax withholding. The Approving Panel for GAAR cases is to consist of members from various backgrounds, with the inclusion of a retired judge and independent subject matter experts.

Taxand's Take

The revised guidelines are of much significance to multinationals that currently, or intend to, invest in India. It is expected that the Committee's final recommendations will be considered by the Indian Government. The aim of the revised guidelines is to settle the fears of taxpayers, especially foreign investors. Specifically, the grandfathering of existing investments and recommended protection to investments through Mauritius and Singapore are of special importance, as a large part of foreign investment in India is from these two jurisdictions due to the current favourable tax treaties.

The final recommendations, pending further Committee discussions, are expected in October 2012. The deferment by 3 years, if accepted, should be used by multinationals to closely monitor developments relating to GAAR and align their investment and operating strategies for India. While new investments, structures and arrangements should be put in place, after carefully considering the spirit of the GAAR provisions, it would also be useful to review existing arrangements and structures.

Your Taxand contacts for further queries are:
Abhishek Goenka

T. +91 80 4032 0000

Anurag Jain
T. +91 11 1339 5254

This article has been republished in Thomson Reuters WTE Practical International Tax Strategies, 15 November 2012

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