GAAR

General Anti Avoidance Rules (GAAR) Introduction: -

General Anti Avoidance Rules i.e. GAAR as the name suggests was made applicable to target at arrangements or transactions made specifically to avoid taxes. Originally proposed in Direct Tax Code 2009 but could see the light of the day in 2012 when Sh. Pranab Mukherjee, then Finance Minister, during Budget session introduced the GAAR. The total problem started after the Vodafone purchased the stake in Hutchison Essar Limited through the deal structured in way that transactions took place in Cayman Islands. After lot of controversy finally GAAR came into effect from 1st​​ April 2017 (AY 2018-19 onwards) and it was provided that foreign investments prior to August 2010 will not Attract GAAR. The main purpose of GAAR was to disallow tax​​ benefits if it is found that the main purpose of transaction was tax avoidance and not commercial. ​​ 

Section 95 of the Income Tax Act, 1961 deals with the provisions of Applicability of General Anti Avoidance Rules, which is reproduced below: -

• Notwithstanding anything contained in the Act, an arrangement entered into by an assessee may be declared to be an​​ impermissible avoidance arrangement​​ and the consequence in relation to tax arising therefrom may be determined subject to the provisions of this Chapter.

• This Chapter shall apply in respect of any assessment year beginning on or after the​​ 1st day of April, 2018.

Explanation—For the removal of doubts, it is hereby declared that the provisions of this Chapter may be applied to​​ any step in, or a part of, the arrangement as they are applicable to the arrangement.

Impermissible avoidance arrangement​​ as defined u/s 96

• An impermissible avoidance arrangement means an arrangement, the main purpose of which is​​ to obtain a tax benefit, and it—

• • creates rights, or​​ obligations, which are not ordinarily created between persons dealing at arm's length;

  • results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;

  • lacks commercial substance​​ or is deemed to lack commercial substance under section 97, in whole or in part; or

  • is entered into, or carried out, by means, or in a manner, which are not​​ ordinarily employed for​​ bona fide​​ purposes.

• An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been entered​​ into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit,​​ notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit.

Arrangement to lack commercial substance as defined u/s 97 of the Income Tax Act, 1961

• An arrangement shall be deemed to lack commercial substance, if—

• • 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; or

  • it involves or includes—

• • 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; or

• • 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​​ (but for the provisions of this Chapter) for a party; or

  • it does not have a​​ significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained (but for the provisions of this Chapter).

• For the purposes of sub-section (1),​​ round trip financing includes any arrangement in which, through a series of transactions—

• • funds are transferred among the parties to the arrangement; and

  • such transactions​​ do not have any substantial commercial purpose other than obtaining the tax benefit (but for the provisions of this Chapter),

without having any regard to—

• whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement;

• the time, or sequence, in which the funds involved in the round trip financing are transferred or received; or

• the means by, or manner in, or mode through, which funds involved in the round trip financing are transferred or received.

• For the purposes of this Chapter, a party to an arrangement shall be an accommodating party, if the main purpose of the direct or indirect participation of that party in the arrangement, in whole or in part, is to obtain,​​ directly or indirectly, a tax benefit (but for the provisions of this Chapter) for the assessee whether or not the party is a connected person in relation to any party to the arrangement.

• For​​ the removal of doubts, it is hereby clarified that the following may be relevant but shall not be sufficient for determining whether an arrangement lacks commercial substance or not, namely:—

• • the period or time for which the arrangement (including operations therein) exists;

  • the fact of payment of taxes, directly or indirectly, under the arrangement;

  • the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement.

Consequences of impermissible​​ avoidance arrangement as defined u/s 98

• If an arrangement is declared to be an impermissible avoidance arrangement, then, the consequences, in relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined, in such manner as is deemed appropriate, in the circumstances of the case, including by way of but not limited to the following, namely:—

• • disregarding, combining or re-characterising any step in, or a part or whole of, the impermissible avoidance arrangement;

  • treating the impermissible avoidance arrangement as if it had not been entered into or carried out;

  • disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;

  • deeming persons who​​ are connected persons in relation to each other to be one and the same person for the purposes of determining tax treatment of any amount;

  • reallocating amongst the parties to the arrangement—

• • any accrual, or receipt, of a capital nature or revenue nature;​​ or

  • any expenditure, deduction, relief or rebate;

• • ​​ treating—

• • the place of residence of any party to the arrangement; or

  • the situs of an asset or of a transaction,

  • at a place other than the place of residence, location of the asset or location of the transaction as provided under the arrangement; or

• • considering or looking through any arrangement by disregarding any corporate structure.

• For the purposes of sub-section (1),—

• • any equity may be treated as debt or​​ vice versa;

  • any accrual, or receipt, of a capital​​ nature may be treated as of revenue nature or​​ vice versa;​​ or

  • any expenditure, deduction, relief or rebate may be re-characterised.

Treatment of connected person and accommodating party under section 99

For the purposes of this Chapter, in determining whether a tax benefit exists,—

• • the parties who are connected persons in relation to each other may be treated as one and the same person;

  • any accommodating party may be disregarded;

  • the accommodating party and any other party may be treated as one and the same​​ person;

  • the arrangement may be considered or looked through by disregarding any corporate structure.