TAX ALERT GENERAL ANTI AVOIDANCE RULES (GAAR) NOTIFICATION

Transcription

1 TAX ALERT GENERAL ANTI AVOIDANCE RULES (GAAR) NOTIFICATION Notification No.75/2013/F.No.142/19/2013-TPL dated TAX & REGULATORY SERVICES DIRECT TAX

2 BACKGROUND OF GAAR PROVISIONS General Anti Avoidance Rules (GAAR) had first been introduced in the Direct Taxes Code (DTC) in 2009 to curb Impermissible Avoidance Arrangement entered into by a person to avoid taxes. The GAAR had been introduced to deal with aggressive tax planning involving use of sophisticated structures. Although originally forming a part of the DTC, the Finance Act, 2012 introduced the same in the Income-tax Act, 1961 (the Act) to be implemented w.e.f.1 April Thereafter, the Central Board of Direct Taxes (CBDT) constituted a Committee under the Chairmanship of the Director General of Income-tax (International Taxation) : To frame guidelines for proper implementation of GAAR provisions; To provide recommendations for formulating guidelines to implement the GAAR provisions; To draft a circular so as to ensure that GAAR is not applied indiscriminately. On 28 June 2012, Committee released its draft guidelines and invited suggestions / comments from all the stakeholders and general public. Subsequently, Hon ble Prime Minister constituted an Expert Committee (EC) under chairmanship of Dr. Parthasarathi Shome to vet and rework the Guidelines based on comments from various stakeholders and general public. Page 2

3 BACKGROUND OF GAAR PROVISIONS EC fairly recognized the need to address various apprehensions of all stakeholders. Based on comments received from stakeholders, the Committee reworked the draft GAAR guidelines and recommended amendment in the Act, guidelines to be prescribed under Income-tax Rules, 1962 (the Rules) and clarifications & illustrations through Circular. To soothe the nerves of jittery investors, the finance minister P Chidambaram in January 2013 announced the postponement of the implementation of Chapter dealing with GAAR by two years to 1 April In the Finance Act 2013, GAAR provisions were modified in line with representations of the stakeholders and recommendations made by EC and made the same operative from FY as against FY Further, providing cushion to large stakeholders and acknowledging additional recommendations of EC and carving out the procedural aspects, the CBDT has now vide Notification No. 75/2013/F.No. 142/19/2013-TPL dated , inserted Rules 10U to 10UC, which will come into effect on 1st April, The rules also notify the Forms for reference and notice. Page 3

4 SYNOPSIS OF GAAR PROVISIONS (as introduced by Finance Act, 2013) Intention : To curb the misuse or abuse of the provisions of the Act and aggressive tax planning made via sophisticated corporate structures. Provisions: Conditions for treating a transaction / arrangement as an impermissible avoidance arrangement Primary Condition: To obtain Tax Benefit Additional Conditions: (Any one of the below) To treat a transaction / arrangement as an impermissible avoidance arrangement. To codify the principles of Substance Over Form. To tax transactions lacking commercial substance. To override the Double Taxation Avoidance Agreements (DTAA). Will take prospective effect from Assessment Year (AY) i.e. FY Certain rights and obligations which are not ordinarily created between persons dealing at ALP Results, directly or indirectly in the misuse or abuse of the provision of the Act Lacks commercial substance or is deemed to lack commercial substance in whole or in part Entered into or carried out by means or in a manner which are not ordinarily employed for bonafide purposes Page 4

5 Rules to Monitor GAAR Rule 10U : GAAR provisions not to apply in certain cases New Rules The GAAR provisions shall not apply to an arrangement where the tax benefit in the relevant assessment year arising, in aggregate, to all the parties to the arrangement does not exceed a sum of INR 3 crore. The provisions of GAAR shall not be applicable to any person, being a non-resident, in relation to investment made by him by way of offshore derivative instruments (such as Participatory Notes) or otherwise, directly or indirectly, in a FII. EC Recommendation Monetary threshold of INR 3 crore of tax benefit (including tax only, and not interest etc) to a taxpayer in a year should be used for the applicability of GAAR provisions. In case of tax deferral, the tax benefit shall be determined based on the present value of money. Investments in FII by non-resident investors should be excluded from the purview of GAAR as it may result in multiple taxation of the same income. Page 5

6 Rules to Monitor GAAR Rule 10U : GAAR provisions not to apply in certain cases New Rules The provisions of GAAR shall not be applicable to a FII: who is an assessee under the Act; who has not availed any tax treaty benefit; who has invested in listed or unlisted securities, with the prior permission of the competent authority, in accordance with the Securities and Exchange Board of India (Foreign Institutional Investor) Regulations, 1995 and such other regulations as may be applicable, in relation to such investments EC Recommendation Where an FII chooses not to avail any tax treaty benefit and subjects itself to tax in accordance with the Act, then, the provisions of GAAR shall not apply to such FII. Page 6

7 Rules to Monitor GAAR Rule 10U : GAAR provisions not to apply in certain cases New Rules The provisions of GAAR shall not be applicable to any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of investments made before the 30 August 2010 by such person. Without prejudice to the above provision, the GAAR provisions shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the 1 April EC Recommendation (partially considered) All investments (though not arrangements) made by a resident or non-resident and existing as on the date of commencement of the GAAR provisions should be grandfathered so that on exit (sale of investments) on or after this date, GAAR provisions are not invoked for examination or denial of tax benefit. Only investments (not arrangement) made till 30 August 2010 is grandfathered. Thus, it appears that any arrangement entered prior to 30 August 2010 and any tax benefit arising post 1 April 2015 would be attracted by GAAR provisions. Page 7

8 Rules to Monitor GAAR Clarification on definition of tax benefit The said notification also clarifies that definition of tax benefit as per section 102(10) and computed in accordance with GAAR provisions shall be with reference to the only amount of tax involved in a reduction or avoidance or deferral of tax or other amount payable under this Act; or an increase in a refund of tax or other amount under this Act; or a reduction or avoidance or deferral of tax or other amount that would be payable under this Act, as a result of a tax treaty; or an increase in a refund of tax or other amount under this Act as a result of a tax treaty; or a reduction in total income ; or the tax that would have been chargeable had the increase in loss referred to therein been the total income. Page 8

9 Rules to Monitor GAAR Rule 10UA : Determination of consequences of impermissible avoidance arrangement New Rules If a part of arrangement is declared to be an impermissible avoidance arrangement than the consequences in relation to tax shall be determined with reference to such part only. EC Recommendation Where only a part of the arrangement is impermissible, the tax consequences of an impermissible avoidance arrangement will be limited to that portion of the arrangement. Page 9

10 Rules to Monitor GAAR Rule 10UB : Notices, Forms for reference Assessing Officer (AO) shall, before making a reference to the Commissioner, issue a notice in writing to the assessee seeking objections, if any, to the applicability of GAAR provisions in his case. The said notice should contain: - details of the arrangement to which the GAAR provisions are proposed to be applied; - the tax benefit arising under the arrangement; - the basis and reason for considering that the main purpose of the identified arrangement is to obtain tax benefit along with the list of documents and evidence relied upon him; - the basis and the reasons why the arrangement satisfies the supplementary conditions along with the list of documents and evidence relied upon him. Page 10

11 Rules to Monitor GAAR Rule 10UB & 10UC: Notices, Forms for reference & Time Limits# Particulars Form Time Limit Reference by AO to Commissioner Form No.3CEG - Issue of directions by Commissioner to AO where no objections are raised by the assessee against invocation of GAAR provisions - Within 1 month from the end of the month in which date of compliance of the notice is issued by the Commissioner to the assessee Issue of directions by Commissioner to AO for not invoking GAAR provisions after considering - the reference received from AO under sub section (1) of Section 144BA -the reply of the assessee in response to the notice issued under sub section (2) of section 144BA Commissioner shall record his satisfaction and enclose it with reference to Approving Panel Form No. 3CEH Form No. 3CEI Within 1 month from the end of the month in which reference is received by Commissioner Within 2 months from the end of the month in which final submission of assessee is received by Commissioner Within 2 months from the end of the month in which final submission of assessee is received by Commissioner # CBDT has in principle accepted the timelines and statutory forms outlined in the EC report Page 11

12 Our Comments Introducing GAAR reflect that the government is trying to achieve balance between attracting investment into the country and protecting the tax base from tax avoidance and tax evasion using aggressive tax planning; With the systematic approach toward GAAR applicability, its wider spectrum and the defined administrative process, thereby preparing India Inc. towards GAAR applicability and its impact, if any, and leading to a path of certainty. Page 12

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