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General Anti Avoidance Rules - Draft Guidelines Issued
In order to codify the doctrine of substance over form, the Finance Act, 2012 had incorporated anti- avoidance provisions in the form of General Anti Avoidance Rules 'GAAR' under Chapter X-A of the Income Tax Act, 1961. The Chairman of the Central Board of Direct Taxes 'CBDT' had constituted a committee for formulating guidelines for the implementation of GAAR and to provide clarity on the provisions to safeguard taxpayers against the indiscriminate use of the provisions. Taxand India examines the draft guidelines and recommendations of the Committee to assess how they are likely to impact multinationals.
The draft recommendations of the Committee discuss several aspects pertaining to the GAAR provisions and also provide illustrations of the applicability of the GAAR provisions. Broadly, the recommendations/clarifications can be classified under the following:
- Overall guidance on GAAR provisions
- Tax evasion versus Tax mitigation
- Safe harbour for taxation of Foreign Institutional Investors 'FIIs'
- Specific Anti Avoidance Rules 'SAAR' versus GAAR
- Impact on holding companies
- Business restructuring
The draft guidelines are clearly a mixed bag with a fair share of positives and negatives. The recognition of the difference between Tax Mitigation and Tax Avoidance and also the non applicability of GAAR in cases where the legislation already contemplates SAAR are a step in the right direction. On the other hand, the clarification regarding FIIs which effectively offer no safe harbor will be seen by the investment community as a dampener. On an overall basis while the guidance note is a step towards the right direction, a lot more clarity needs to be brought in, especially on the meaning and interpretation of various terms such as misuse or abuse, commercial substance, etc to provide a reasonable level of precision and certainty in understanding the impact of GAAR on day to day business transactions.
With the sweeping nature of the GAAR provisions coupled with the lack of complete clarity on the provisions, it is extremely important to focus on various aspects such as comprehensive documentation, commercial substance, etc at the transaction stage itself.