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Update: GAAR rules notified

India

The introduction of General Anti Avoidance Rules (GAAR) in the Income Tax Act has been relatively swift from the time GAAR was first proposed in the Direct Taxes Code, 2010 (DTC). GAAR will take effect from 1 April 2015 and the working rules have now been notified - an indication that GAAR may be implemented without any further deferral. Taxand India discusses the procedure and key features of GAAR. 

Key features of GAAR

GAAR would be applicable to arrangements which give rise to tax benefits on or after 1 April 2015 irrespective of the date on which an arrangement has been entered into. However, there is a grandfathering provision in respect of income arising from transfer of investments made before 30 August 2010, the date on which the DTC was tabled in Parliament.

Further, GAAR would not be applicable in the following situations: 

  • Threshold not exceeded –  where aggregate tax benefits arising to all the parties under an arrangement do not exceed INR 30 million for the tax year
  • Specified Foreign Institutional Investors (FII’s) – where FIIs’ do not seek tax treaty benefits and make investments as per SEBI / other regulations
  • Non-resident investors of FIIs’ – where direct or indirect investments have been made by non-resident investors in offshore derivate instruments issued by FIIs

Procedure for invoking GAAR
 
GAAR require the tax officer to issue a show cause notice with detailed reasoning regarding why the tax officer feels that GAAR should apply and to provide an opportunity of being heard to the taxpayer before making a reference to the Commissioner for invoking GAAR.
 
Separately, it is worth noting that the time taken to make a reference for applicability of GAAR would be excluded from the period of limitation, which elongates the period of a tax audit. However, the taxpayer would have the remedy to directly appeal before the Income Tax Appellate Tribunal against the order of the tax officer which is passed after approval of the Approving Panel.

Discover more: GAAR rules notified


Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010
E. mukesh.butani@bmradvisors.com

Taxand's Take

The Finance Ministry released a statement in January 2013 stating certain decisions had been taken by the Government with respect to GAAR legislation. The newly introduced Rules capture some of these decisions, but more amendments to the Income Tax Act or administrative clarifications will be required in respect of other key aspects. For example, issues like application of GAAR when Specific Anti Avoidance Rules (SAAR) apply continue to be open and would require clarification. It is hoped that the above issues will get ironed out, and necessary amendments to the legislation are made prior to the GAAR enactment in 2015.

Taxand's Take Author

Mukesh Butani
Taxand Board member
India