Direct Tax Proposals 2012 : GENERAL ANTI-AVOIDANCE RULES..

                     Understanding

Direct Tax

                                                                                          ProposalsGeneral Anti Avoidance Rules (GAAR)      

New Section (w.e.f. 01-04-2012)

GAAR is Introduced in IT Act to ‘COUNTER AGGRESIVE TAX PLANNING.’ A.     Applicability :       An ‘Arrangement’ whose MAIN PURPOSE or ONE of the MAIN PURPOSE is       to obtain a “TAX BENEFIT” and       which Also satisfies at least ONE of the “FOUR TESTS”,       can be declared as       an “Impermissible Avoidance Arrangements”                Assessee have to ‘PROVE’ that Obtaining of ‘TAX BENEFIT’ is ‘NOT’ the MAIN PURPOSE 1.    Four Tests includes: ü  The arrangement Creates Rights and Obligations, which are “Not normally Created” between parties dealing at arm’s length. ü  It results in “MISUSE or ABUSE” of provisions of tax laws. ü  It lacks commercial substance or is “DEEMED TO LACK COMMERCIAL SUBSTANCE”. ü  Is carried out in a manner, which is normally not employed for bonafide purpose... 2.    DEEMED TO LACK COMMERCIAL SUBSTANCE, :       The Substance or effect of the arrangement as a WHOLE, is inconsistent with, or Differs significantly from, the FORM of its INDIVIDUAL STEPS or a part; or       It involves or includes - ·         Round Trip Financing; ·         an Accommodating party ; ·         elements that have effect of offsetting or cancelling each other; or       Transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of fund which is subject matter of such transaction; or       It involves the ·         location of an asset or ·         of a transaction or ·         of the place of residence of any party ·         Which would not have been so located for. Any substantial commercial purpose other than Obtaining TAX BENEFIT for a party.       Certain circumstances like ·         Period of existence of arrangement, ·         Taxes arising from arrangement, ·         Exit Route, Shall not be taken into account while determining ‘Lack of Commercial Substance’ test for an arrangement. 3.    Consequences when Transactions treats as “ Impressible Avoidance Agreements Arrangement in relation to tax or benefit under a tax treaty can be determined by keeping in view the circumstances of the case, like :-       Disregarding or Combining any step of the arrangement.       Ignoring the arrangement for the purpose of taxation law.       Disregarding or combining any party to the arrangement.       Reallocating expenses and income between the parties to the arrangement.       Relocating place of residence of a party, or location of a transaction or situs of an asset to a place other than provided in the arrangement.       Considering or “LOOKING THROUFG” the arrangement by disregarding any corporate structure.       Re-characterizing equity into debt, capital into revenue etc. B.      For Limited Purpose GAAR will override DTAA : C.    Procedural Aspects regarding Invocation of GAAR:       AO shall make a reference to the Commissioner for invoking GAAR and       Commissioner shall hear the taxpayer and if he is not satisfied by the reply of taxpayer and is of the opinion that GAAR provisions are to be invoked, he shall refer the matter to an Approving Panel.       In case the assessee does not object or reply, the Commissioner shall make determination as to whether the arrangement is an impermissible avoidance arrangement or not.       The Approving Panel has to dispose the reference within 6 months from the end of the month in which the reference was received from the Commissioner       The Approving Panel shall either declare an arrangement to be impermissible or declare it not to be so after examining material and getting further inquiry to be made.       AO will finally determine consequences of such a positive declaration of arrangement.       Previous approval of Commissioner is Required for passing Final order incorporating the GAAR Effect.        Assessee can file Appeal Directly in ITAT.       The period taken by the proceedings before Commissioner and Approving Panel shall be excluded from time limitation for completion of assessment.       The Approving Panel shall comprise of officers of rank of Commissioner and above and will have a minimum of three members.       Board shall prescribe a scheme for regulating the condition and manner of application of these provisions.

Brief Comment:

v Provisions of GAAR were first introduced in DTC Bill, 2010. DTC is likely to come in picture w.e.f. 01-04-2013, but GAAR proposed to bring into picture w.e.f. 01-04-2012.

v Indian GAAR is in line with GAAR provisions in South Africa.

v GAAR will override entire Income Tax Act.

v GAAR is proposed introduced to counter AGGRESIVE tax planning.

v GAAR seems to codify “Substance over Form”

v Real Intention, Overall Effect of Transaction & Purpose of Arrangement is the key to Invoke GAAR.

v GAAR provisions can apply in part or in full transaction.

v GAAR provisions casts a huge onus of discharge of burden of proof on the tax payer and given wide powers to tax authorities on a issue, which is highly subjective. Litigations will rise due to applicability of these provisions.

v  SC in the case of Azadi Bachao Andolan & MacDowell’s Case had dealt with the issue of Tax Avoidance, Tax evasion & Tax Planning. It is interesting to see that after GAAR, how much these decisions will help assessee to Counter “GAAR”

v GAAR provisions will apply “ In Addition to “ the provisions available in the Act.

v The Words “MISUSE” & “ABUSE” are not defined in the proposed amendment. This will bring more Uncertainty in GAAR provisions, which is itself lacks clarity.

v Genuine Business transactions, may also hit by GAAR provisions.

v Transactions having “Commercial Justifications“ in all respects, may be out of purview of GAAR, subject to other conditions.

v GAAR provisions will override Tax treaty with various countries, which brings the life of taxpayers more difficult.  

v    Govt. will bring detailed guidelines for applicability of these provisions.

v  Approving Panel consists of Three Commissioners, who will finally decide whether or not to invoke GAAR.  After the “DRP”, it will be interesting to see that how Approving Panel will counter the arguments of Assessee.

v It will be interesting to see that, whether Beneficial Recommendations of Standing committee of DTC, will be incorporated, when the Finance Bill will becomes ACT.   

 Extract of Memorandum Explaining Finance Bill

“ The question of substance over form has consistently arisen in the implementation of taxation laws. In the Indian context, judicial decisions have varied. While some courts in certain circumstances had held that legal form of transactions can be dispensed with and the real substance of transaction can be considered while applying the taxation laws, others have held that the form is to be given sanctity. The existence of anti-avoidance principles are based on various judicial pronouncements. There are some specific anti-avoidance provisions but general anti-avoidance has been dealt only through judicial decisions in specific cases.

In an environment of moderate rates of tax, it is necessary that the correct tax base be subject to tax in the face of aggressive tax planning and use of opaque low tax jurisdictions for residence as well as for sourcing capital. Most countries have codified the “substance over form” doctrine in the form of General Anti Avoidance Rule (GAAR).”