Seeking to assuage investor concerns ahead of implementation of GAAR from April 1, the Tax Department on Friday said the provisions of tax avoidance rules will not apply to a transaction that does not carry a tax benefit based on the jurisdiction it is routed through.
It said adequate procedural safeguards are in place to ensure that General Anti-Avoidance Rules (GAAR), which seek to prevent companies from routing transactions through other countries to avoid taxes, are invoked in "a uniform, fair and rational manner".
GAAR, it said, will come into force from April 1 and can be invoked only through a two-stage process involving a nod at the level of principal commissioner of income tax and a panel headed by a high court judge.
The new rules give tax authorities the right to scrutinise and tax transactions which they believe are structured solely to avoid taxes.
But it "will not interplay with the right of the taxpayer to select or choose method of implementing a transaction", the Central Board of Direct Taxes said in clarifications on GAAR.
GAAR provisions shall be effective from assessment year 2018-19 and "shall not be invoked merely on the ground that the entity is located in a tax efficient jurisdiction," it said. "If the jurisdiction of FPI is finalised based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, GAAR will not apply."
This essentially means that any transaction that carries a tax benefit could be questioned. The taxman may potentially want to know whether the transaction was done in the normal course of business or conducted simply with the intention to avoid taxes.
India will be the 17th nation in the world to have laws that aim to close tax loopholes. Beginning with Australia in 1915, GAAR is in force in nations like Singapore, China and the UK.
CBDT said the adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies and the same are required to be tackled through domestic anti-avoidance rules.
"However, if a case of avoidance is sufficiently addressed by Limitation of Benefits (LoB) provisions in the tax treaty, there shall not be an occasion to invoke GAAR," it said.
The proposal to apply GAAR will be vetted first by the Principal Commissioner/Commissioner of I-T and at the second stage by an Approving Panel headed by a judge of High Court.
"The stakeholders have been assured that adequate procedural safeguards are in place to ensure that GAAR is invoked in a uniform, fair and rational manner," CBDT said, adding that the government is committed to providing certainty and clarity in tax rules.
CBDT further said that if at the time of sanctioning an arrangement, the Court has explicitly and adequately considered the tax implications, GAAR will not apply to such an arrangement. It would also not apply if an arrangement is held as permissible by the Authority for Advance Rulings.
"Further, it has been clarified that if an arrangement has been held to be permissible in one year by the PCIT/CIT/ Approving Panel and the facts and circumstances remain the same, GAAR will not be invoked for that arrangement in a subsequent year," CBDT said.
The Tax Department also clarified that levy of penalty under GAAR would depend on "facts and circumstances of the case and is not automatic".
Finance Minister Arun Jaitley had in his Budget speech in 2015, deferred GAAR implementation by two years and also said that the investments made up to March 31, 2017 shall not be subjected to GAAR, which was to be applied on those claiming tax benefit of over Rs 3 crore.
CBDT today clarified that Rs 3 crore limit of tax benefit calculation for each arrangement cannot be read with a single tax payer as GAAR is with respect to an entire arrangement that has been entered into.
"One good thing is that CBDT has clarified that if LoB sufficiently addresses tax avoidance then GAAR will not apply.
Most new treaties being signed are with LOB. Therefore foreign investors have clarity," Ashok Maheshwary and Associates LLP Partner Amit Maheshwari said.
The exceptions carved out for Foreign Institutional Investors (FII) and investors in FIIs alleviated some concerns as the recent clarification gives a ray of hope to the FPI that GAAR shall apply only to abusive or highly aggressive/ contrived arrangements, said Nangia & Co Managing Partner Rakesh Nangia.
Another positive thing is that court approved arrangements are outside the purview of GAAR, Maheshwari said, adding that FPIs would have sufficient clarity on taxation.
In May last year, CBDT had started consultations with stakeholders asking them to give their views where they require clarity before GAAR is implemented.
General Anti-Avoidance Rule (GAAR) was part of the 2012-13 Budget speech of the then Finance Minister Pranab Mukherjee to check tax evasion and avoidance.
However, its implementation was repeatedly postponed because of the apprehensions expressed by foreign investors.