The General Anti Avoidance Rule (GAAR) has been announced by the Union Finance Ministry, which will be come into effect from 1st April 2017. GAAR has been introduced to prevent businesses from routing transactions via other countries to evade taxes.
Regarding the GAAR, Income Tax (IT) Department of India has issued some clarifications concerning GAAR implementation, in order to address foreign investors’ concerns over anti-evasion measure implementation.
The GAAR has been framed chiefly to minimalize and check tax avoidance. By doing so, India will be the 17th country in the world that has laws for closing tax loopholes. Currently, GAAR has been implemented in countries like Singapore, Australia, United Kingdom and China.
1. GAAR will give power to IT department to scrutinize transactions planned in a way to purposely avoid paying tax.
2. All transactions that will be approved by Indian courts and quasi-judicial authorities such as the authority for advance ruling, and the one’s that precisely address the tax avoidance issue will not be subject to the GAAR test.
3. GAAR will not be appealed in cases where investments are routed via tax treaties with sufficient limitation of benefit (LOB) clause for addressing avoidance of tax.
4. GAAR will not be applicable on split/consolidation of holdings or bonus issuances, or compulsorily convertible instruments in respect of investments made before 1st April 2017 in the hands of the same investor.
5. GAAR will be first scrutinised by an officer or commissioner of income tax/principal commissioner and will be scrutinised by an approving panel at the second stage, which will be headed by a judge of high court.
6. You must know that GAAR will not be applicable on foreign portfolio investor if its main purpose is not to obtain tax benefits and its jurisdiction is grounded on non-tax commercial considerations.
7. Adequate safeguards have also been set, in order to prevent misuse of provisions of the GAAR by the IT department.