General Anti- Avoidance Rules notification October 2013

General Anti- Avoidance Rules notification October 2013

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FAQs: GAAR notification dated 23 September 2013 What are the broad contours of the GAAR notification dated 23 September 2013? Since the contents of the notification are not part of the Income Tax Act, what is the value and importance of this notification? What are the safe harbours provided against the invocation of statutory GAAR? What will happen to existing investments and arrangements? How will the threshold for a safe harbour of 30 million INR be determined? What will happen when only a part of an arrangement is declared as impermissible avoidance arrangement? How would a tax officer prepare a case for statutory GAAR? Can the revenue department recommend to the approving panel for the invocation of statutory GAAR for years for which no assessment proceeding is pending? Will the invocation of statutory GAAR for a particular year lead to the reopening of cases that belong to the earlier years? What are the timelines provided for the completion of the examination under statutory GAAR at the level of commissioner? General Anti-Avoidance Rules notification 3

What are the broad contours of the GAAR notification dated 23 September 2013? The GAAR notification dated 23 September 2013 provides for the following: Safe harbour; instances where statutory GAAR will not be invoked and clarification related thereto Tax consequences of entering into arrangement considered partly impermissible avoidance arrangement (IAA) Detailed procedure for administration of statutory GAAR, mainly to limit routine use of statutory GAAR Providing timelines for the completion of statutory GAAR examination at the level of commissioner 4 PwC

Through the notification, Rules have been promulgated. These are designed to streamline the introduction and administration of statutory GAAR provisions. It is for the benefit of both the taxpayers as well as the tax administration. Rules form subordinate legislation and have the status of law, to the extent not inconsistent with the statute. Since the contents of the notification are not part of the Income Tax Act, what is the value and importance of this notification? General Anti-Avoidance Rules notification 5

What are the safe harbours provided against the invocation of statutory GAAR? Statutory GAAR will not apply to the following: An arrangement where the tax benefit in the relevant tax year arising in aggregate to all the parties to the arrangement does not exceed a sum of 30 Million INR A foreign institutional investor who has not availed treaty benefit and has invested in securities with prior permission of relevant authorities A non-resident in relation to investment in offshore derivative instrument or otherwise in a FII Any income from transfer of investment made before 30 August 2010 6 PwC

Income from the transfer of investment where such investment is made before 30 August 2010 is grandfathered. Such income whether taxable by way of capital gains (where the investment is a capital asset) or business income (where the seller is a dealer in investment) will not be subject to statutory GAAR. However, other streams of income (such as interest income) arising from such investment in respect of which tax benefit is obtained on or after 1 April 2015 may be liable for examination under statutory GAAR. The investments made on or after 30 August 2010 are not grandfathered even if such investments are made under the arrangement which exists prior to 30 August 2010. The arrangements other than of making an investment are not grandfathered and the tax benefit arising from such arrangements on or after 1 April 2015 may be subject to examination under statutory GAAR. The date on which such an arrangement is entered into, is irrelevant. An example of such a tax benefit is the case of treaty abuse where the recipient of income (say royalty income) is not the beneficial owner of the income, but is an entity interposed just to claim concessional treatment under a tax treaty. Such arrangements will not be grandfathered and thus,tax benefit arising from such an arrangement post 1 April 2015 may be examined under statutory GAAR provisions. What will happen to existing investments and arrangements? General Anti-Avoidance Rules notification 7

How will the threshold for a safe harbour of 30 million INR be determined? One of the safe harbours provided is that statutory GAAR will not apply to an arrangement where the tax benefit in the relevant tax year in aggregate to all parties to the arrangement does not exceed 30 million INR. At this stage, there is no clarity on how a participant in the arrangement will know the quantum of tax benefit arising to a co-participant, especially in a situation where there are many participants. Again it is possible that a participant who derives tax benefit of much lesser than 30 million INR in an arrangement will also face examination under statutory GAAR because the tax benefit to him or her together with benefit derived by other participants exceeds 30 Million INR. This may happen without the knowledge of an individual participant. 8 PwC

When a part of an arrangement is declared to be an impermissible avoidance arrangement (IAA), the tax consequences shall be determined with reference to that part only. What will happen when only a part of an arrangement is declared as impermissible avoidance arrangement? General Anti-Avoidance Rules notification 9

How would a tax officer prepare a case for statutory GAAR? Before making reference to the commissioner, a tax officer will be required to issue to the taxpayer a show cause notice containing the following details: Details of arrangement (including tax benefit thereunder) to which statutory GAAR is proposed to be applied Reasons for considering that the main purpose of that arrangement is to obtain tax benefit Reasons why the tainted element tests (such as lacking commercial substance) are met List of documents relied upon for the above The taxpayer will be given an opportunity to establish that the arrangement is not an IAA. The prescribed forms require detailed reasons to arrive at a conclusion on the invocation of statutory GAAR to be provided by the revenue authorities at each level of statutory GAAR proceedings. 10 PwC

It appears from the prescribed forms that the tax officer and the commissioner can recommend the invocation of statutory GAAR not only for the tax year for which proceedings are pending, but also for other tax years (earlier and forthcoming tax years). Similarly, as per statutory provisions, the approving panel is required to specify the years to which its IAA declaration shall apply. Can the revenue department recommend to the approving panel for the invocation of statutory GAAR for years for which no assessment proceeding is pending? General Anti-Avoidance Rules notification 11

Will the invocation of statutory GAAR for a particular year lead to the reopening of cases that belong to the earlier years? The invocation of statutory GAAR for a particular year per se should not lead to the reopening of cases that belong to the earlier years. Such reopening will be guided by existing statutory provisions and judicial precedents. The binding directions of the approving panel can be implemented in an ongoing assessment or in reassessment proceedings. 12 PwC

Action by CIT Issue of direction to the tax officer by the commissioner, where statutory GAAR provisions are not to be invoked Where suo-moto direction is given merely after considering the reference from the tax officer Where direction is given after considering the reply received from the taxpayer Issue of direction to the tax officer by the commissioner, where within the time allowed no objections are raised by the taxpayer against invocation of statutory GAAR Reference to the GAAR approving panel by the commissioner Time Limit Within one month from the end of the month in which reference is received by commissioner Within two months from the end of the month in which final submission is received from the taxpayer Within one month from the end of the month in which date of compliance of notice issued by commissioner to the taxpayer falls Within two months from the end of the month in which final submission of the taxpayer is received in response to the notice issued by the commissioner What are the timelines provided for the completion of the examination under statutory GAAR at the level of commissioner? General Anti-Avoidance Rules notification 13

14 PwC The period commencing from the date on which GAAR reference is received by the commissioner from the tax officer to the date on which direction is received by the tax officer will add on to the time frame available for normal assessment proceedings which is three years from end of relevant tax year (four years when there is reference to transfer pricing officer).

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