The Narendra Modi government today issued clarification that GAAR, that is General Anti-Avoidance Rule, will come into effect from April 1, 2017. The General Anti Avoidance Rule (GAAR) provisions shall be effective from the Assessment Year 2018-19 onwards, i.e. Financial Year 2017-18 onwards, the Finance Ministry said in a press release.
It has been clarified that if the jurisdiction of FPI is finalized based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, GAAR will not apply. GAAR will not interplay with the right of the taxpayer to select or choose method of implementing a transaction, the Finance Ministry added.
Government is committed to provide certainty and clarity in tax rules. Further clarifications, if any, on doubts of stakeholders regarding GAAR implementation, will also be provided, the ministry said in an attempt to pacify investors.
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 has also been clarified that GAAR will not apply if an arrangement is held as permissible by the Authority for Advance Rulings, the release added.
Naveen Aggarwal, Partner, Tax, KPMG in India, told FE Online, “The implementation of GAAR is well intended and addresses a number of key issues the industry was seeking clarification on. However, the real test will be the on-ground implementation of assured safeguards.
An effort has been made to address the dispute in application between domestic GAAR and Limitation of Benefits (LoB) in tax treaties. The notification leaves the issue subjective by stating that if a case of avoidance is sufficiently addressed by LoB, then GAAR would not be invoked.
Adequate safeguards have been put in place as GAAR will be vetted first by the Principal Commissioner of Income Tax / Commissioner of Income Tax and at the second stage by an Approving Panel headed by a High Court judge.”
Sudhir Kapadia, National Tax Leader, EY India, is of the view that, “Whilst ideally clarifications by way of specific examples would have been better, it is still heartening to note that 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.”
“Finally, 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. All in all, these clarifications along with the ones on POEM have addressed industry’s long standing request for clarity in Govt’s thinking regarding application of these concepts,” he adds.