Ahead of next week’s Union Budget, the government on Friday made it clear that the General Anti-Avoidance Rules (GAAR) will take effect from FY18 (assessment in FY19) and kept the scope for invoking these provisions rather wide.
Ahead of next week’s Union Budget, the government on Friday made it clear that the General Anti-Avoidance Rules (GAAR) will take effect from FY18 (assessment in FY19) and kept the scope for invoking these provisions rather wide. So a merger or amalgamation can hit the GAAR hurdle even if it is cleared by the designated courts/National Company Law Tribunal. Also, if the taxman feels a past transaction between related parties — a sale-and-lease-back, say — comes under the definition of “impermissible arrangement”, then it could be bitten by GAAR, notwithstanding the grandfathering clause, giving a sort of retrospectivity to the new rules’ applicability. The threat of retrospective application of GAAR, say some analysts, also exists for M&A cases as acquisition of shares in mergers and de-mergers are not grandfathered even if the original shares are bought prior to April 1, 2017, the cut-off date.
Besides, despite the limitation of benefit (LOB) clauses being incorporated in India’s bilateral tax treaties (in Singapore and Mauritius pacts recently), under these pacts, potential assessees won’t enjoy complete immunity from GAAR enforcement: Among a set of GAAR-related clarifications issued on Friday, the tax department said “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”. In short, GAAR could override tax treaties.
But the department boosted the confidence of foreign portfolio investors (FPIs) by clarifying that “if 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 is a breather for FPIs (who pulled out $11 billion from Indian markets in the October-December quarter), as the earlier language for the waiver was stiffer as it made it obligatory on the party to prove that the “main purpose or one of the main purposes” of (selection of base) was not to avoid tax. The GARR relaxation for FPIs, coming as it does after abandonment of the plan to levy minimum alternate tax on their capital gains and the decision to put in abeyance the indirect transfer circular, has been hailed by analysts.
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It is widely expected that Section 9 of the Income Tax Act will be amended by the Finance Act, 2017, to state that foreign investors in India-focused FPIs won’t pay tax in India under the indirect transfer provisions on redemption of units.
Sudhir Kapadia, national tax leader, EY India, said: “The latest circular makes it clear that where a fund has been set up in a jurisdiction for non-tax commercial purposes, GAAR will not apply. Similarly, the right of the taxpayer to choose a particular method of transaction has been protected from the applicability of GAAR.
It has been accepted in principle that if a LOB clause in a treaty sufficiently addresses tax avoidance, GAAR will not apply.
Here again it would have been useful if specific treaties were cited where LOB fulfilment would be adequate.” While the LOB covers conditions related to residency, investment and business, it differs among India’s various bilateral tax treaties.
The recently amended treaty with Singapore, for instance, gives waiver from anti-abuse action if the investor claiming the city-state as jurisdiction had spent S$200,000 there. As many other treaties like the one with Mauritius are not clear of such LOB thresholds, an overriding GAAR could be a cause for concern, analysts said.
According to the tax department, 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. However, it is felt by many that since courts cannot always be expected of evaluating tax implications of say, a merger or de-merger case, the taxman might practically step in with GAAR.
“Discretionary and subjective interpretation might creep in (with regard to sufficiency of LOB as anti-abuse provision). Also, since courts and NCLT have no remit or manpower to deal with tax aspects, GAAR could practically have applicability on M&As,” said Rahul Garg, leader, direct tax, PwC.
The CBDT said: “GAAR will not interplay with the right of the taxpayer to select or choose method of implementing a transaction. Further, grandfathering as per IT Rules will be available to compulsorily convertible instruments, bonus issuances or split / consolidation of holdings in respect of investments made prior to 1st April 2017 in the hands of same investor… It has also been clarified that GAAR will 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.”
“One big welcome move is grandfathering of convertible instruments, shares issued on account of M&As such as split up and consolidation and issue of bonus shares with respect to the shares / instruments issued prior to April 1, 2017,” said Abhishek Goenka , partner, tax and regulatory services, PwC. If a case is cleared by the Authority of Advance Ruling, then GAAR won’t apply on it.
“The clarifications also provide restricted relief for cases where there are specific anti-avoidance rules/LOB clauses in the treaties. However, on this point the guidelines are subjective and could be more directional,” said Girish Vanvari, national head of tax at KPMG in India.
Last week, the government confirmed that the so-called Place of Effective Management (POEM) regulations — which are meant to ascertain the residential status of companies and use it to curb tax avoidance — will take effect from FY17 (assessment year 2017-18). The new POEM draft narrowed the scope of the tool and sought to allay most concerns of the investor community about its potential improper use/misuse.
The tax department stressed that POEM’s intent is not to target Indian multinationals, which have legitimate business activities outside India, but to pin down shell companies and firms created for retaining income outside India although the real control is exercised from India.