Relief on income: No retro applicability of GAAR

By: | Updated: June 25, 2016 8:54 AM

GAAR would apply to any arrangement, irrespective of the date it has been entered into, if tax benefit is obtained from such arrangement on or after April 1, 2017 against the earlier cut off date of April 1, 2015

Ruling out any retrospective applicability of the General Anti Avoidance Rules (GAAR), the finance ministry has said that these would not apply to income earned or received by any person from transfer of investments made before April 1, 2017. As per an earlier draft, GAAR was to apply for income earned from investments made after August 30, 2010.

The GAAR is slated to kick in from 2017-18 (assessment year 2018-19).

At the same time, GAAR would apply to any arrangement, irrespective of the date it has been entered into, if tax benefit is obtained from such arrangement on or after April 1, 2017 against the earlier cut off date of April 1, 2015.

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The rules basically provide the framework for the procedural application of GAAR. The amendment to the rules are to iron out the procedure for implementation of GAAR and removing any inconsistencies therein.

“The rules make the application of GAAR on income from investments prospective inasmuch as any investment made prior to April 1, 2017 will stand grandfathered and will be outside the ambit of GAAR. This is a positive step as this will put to bed any controversy whether investments made prior to implementation of GAAR would be affected or not,” said Rahul Jain, partner at Nangia & Co.

The amendment also matches the revisions made to Indo-Mauritius DTAA in terms of which, Mauritian residents will be liable to capital gains tax on certain investments made on or after April 1, 2017. Similar amendments to the Indo-Singapore treaty are likely to be done going forward, say tax experts.

The amendment to Rule 10U(2) is in line with the fact that GAAR will be operational on April 1, 2017. Sub-rule (2) provides that GAAR will be applicable if a tax benefit is obtained on or after April 1, 2017 irrespective of the date on which any arrangement was made.

“While this provision implies a certain degree of retroactive operation as it covers arrangements made before the cut-off date of April 1, 2017, one hopes that GAAR will be called into operation only to address the more egregious forms of tax avoidance and genuine arrangements made for business considerations are not unnecessarily hit. It would be preferable if the CBDT were to give specific guidance on when this provision will get triggered,” said Jain.

The GAAR provisions had been originally proposed in the Direct Taxes Code. They were deferred from time to time to enable thorough understanding of the impact of the provisions. They are now scheduled to be operative from April 1 2017.

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