Introduction
The High Net Individuals, and Multinational enterprises and corporate are aggressively doing tax planning by engaging in complicated tax structuring to have less payout. Although the structure is legally acceptable, however the object of evading tax via them is not considered moral and is a question for discussion by various countries. In this regard, India has also been taking many steps for enforcement of General Anti Avoidance Rules (‘GAAR’), including amendments to the various bilateral tax treaties with various countries Mauritius, Singapore, Cyprus etc.
General Anti Avoidance Rules (‘GAAR’): Evolution
The General Anti Avoidance Rules (‘GAAR’) were originally proposed along with Direct tax code 2009, with the objective of targeting the transactions made to avoid or evade taxes. And was introduced by the Pranab Mukherjee, in Budget Session on 16 March 2012. GAAR was considered controversial as was containing provisions to seek tax with retrospectively from past overseas deal involving local assets. Therefore, due to negative publicity, including pressure from the group, its implementation was postponed for implementation over 3 years that is to 2016-17.
In year 2015 the tax proposal, postponed the implementation of GAAR for further two years to 2017-18 financial year, and with clarification that the same will not Apply to the investment made prior to March 31, 2017. With this background, thus, applicability and enforcement of the provisions of GAAR began from 1 April, 2017 in Financial Year 2017-18.
Chapter X – A of Income Tax Act, 1961:
The Chapter X-A of the Income Tax Act, 1961 (‘Act’), contains the provisions in relation to GAAR.
The said provisions follow the doctrine of “substance over form”as primary test that is irrespective of the legal structure to take into consideration following points for determining the taxes:
- the effect of transactions
- the intention of the parties, and
- purpose of arrangement.
The tax authorities are empowered by the act to deny any tax benefit, if the transactions or arrangements are for deriving the tax benefits and not having any commercial substance or consideration.
Also, the Section 96 of the Act provides for Secondary Tests:
- Creating rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;
- the misuse, or abuse, of the provisions of this Act – directly or indirectly;
- lacks commercial substance or is deemed to lack commercial substance, in whole or in part; or
- is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bonafide purposes.
The Section 97 further defines the condition of lack of commercial substances – the substance or effect of the arrangement as a whole, is inconsistent and include the location of an asset or of a transaction and have no significant effect upon the business risks or net cash flows without any substantial commercial purpose.
The Rule 10UB of the Income Tax Rules, 1962 lay down the process for invoking the provisions of the GAAR in relation to any arrangement or transaction. The assessing officer provides an opportunity to the assesse for providing objection as to the applicability of the provisions of the GAAR. Thereafter, the tax officer is required to make a reference to the Commissioner of Income Tax in all the cases. And thereafter if the Commissioner considers on the facts and circumstance of the case, that the provisions of GAAR is applicable, a reference shall be made to the Approving Panel regarding the applicability of the provisions of GAAR. In other case if GAAR provisions are not warranted and the Commissioner shall issue direction to the Assessing Officer accordingly.
Thus, the section puts burden on the tax payer to the transaction or arrangement or part thereof was not entered into with the intention of tax benefit or avoidance.
Impermissible Transactions:
In case the tax authority considers a transaction or arrangement, to be impermissible – the consequence would be a denial of the tax benefit or treaty to the assesse.
- disregarding, combining or re-characterising
- Treating the arrangement as if never entered into
- Disregarding and Treating the accommodating party as one and the same
- deeming persons who are connected persons as same persons
- reallocating amongst the parties to arrangement
- treat the place of residence of any party to the arrangement
- the sit us of an asset or of a transaction
In other words, the Assessing officer lifts the veil to look through any arrangement by disregarding any corporate structure; or treat equity as debt, capital expenditure as revenue expenditure or vice versa.
Thus, in order to safeguard against the consequence – the assesse may follow Section 245N, Chapter XIX-B of the Act, which provides for an advance ruling for the arrangement being an impermissible avoidance arrangement or not, further such ruling can be sought either by a resident or a non-resident. It is pertinent to note that it must be taken prior to entering into any such arrangement as Advance Ruling is binding on both the assesse and the revenue.
In Conclusion:
The act provides that even if part of an arrangement or transaction if results in a tax benefit, the whole arrangement to be treated as ‘impermissible avoidance agreement’ resulting into, transactions to bealways prone and susceptible by the tax department. The act allows the tax official to deny the tax benefit, in case the deal is with purpose to evade taxes. Thus, the rules aim to improve transparency in tax matters and help curb tax evasion.
