General Anti Avoidance Rules (GAAR) – Applicability

Many of us have a misconception about GAAR that it deals with Tax evasion and Tax Planning. But, GAAR will come into the picture in the case of “Impermissible avoidance arrangement”, that too only when the tax benefit from such   arrangement exceeds Rs. 3 crore.

All of us know that GAAR provisions are applicable from Assessment year 2018-19 and onwards. So, one should be aware of these provisions not only for examination or knowledge purpose but also for transparency in Arrangements and better tax planning.

GAAR is an Anti-avoidance rule framed by Department of Revenue under ministry of finance to identify and restrict arrangements and transactions that are specifically incurred with a motive of tax evasion. The Vodafone case, the biggest sensation of Indian Taxation history is one of the main reasons for the framework of GAAR.

As mentioned earlier GAAR provisions applicable to “Impermissible avoidance arrangement”. Now let’s get in detail. What are “Impermissible avoidance arrangement”?

An Arrangement will be called as “Impermissible avoidance arrangement” if it satisfies the following two conditions.

1. The main Purpose of entering into such arrangement is to obtain Tax Benefit.

AND

2. If the Arrangement

a) Creates rights or obligations, which are not ordinarily created between persons dealing at ALP (or)

b) Results, directly or indirectly, in the misuse or abuse of the provisions of The Income Tax Act (or)

c) Lacks or deemed to lack commercial substance in the whole or in part (or)

d) Is entered or carried out by means or in a manner which is not ordinarily employed for bonafide purpose.

Now let us analyze the provision in detail

Condition 1 (Primary Condition): It clearly states that if the main purpose of entering into an arrangement is to obtain Tax benefit the provisions of GAAR will be invoked.

Condition 2: An arrangement should satisfy any one of the four conditions along with Condition 1 to be called as “Impermissible avoidance arrangement”.

2(a): In this test we have to examine only those arrangements which are not under the purview of Transfer pricing because it clearly talking about the rights and obligations of the persons other than those dealing at ALP.

2(b): It is clear from the second test that the arrangement should not misuse or abuse any provisions of the Income Tax law. The Arrangement should not results in consequences which are not intended by the law or in contradiction to the any of the provisions of Law

2(c): Third test talks about the “Commercial Substance” of an arrangement.

Those arrangements which lacks commercial Substance and have no bonafide purpose and does not have any significant effect upon business apart from Tax benefit.

The Arrangement is deemed to be the one lacking of commercial Substance if one of the following factors present in it.

• If the effect of An Arrangement as a whole is inconsistent with or significantly differs from the form of its individual steps
• If the arrangement involves the location of

i) An Asset

ii) Transaction

iii) Any of the parties to the arrangement without any substantial commercial substance

• If arrangement does not effect the business risks or Net cash flows of any parties to the arrangement
• It contains elements/Transactions which have effect of offsetting or cancelling each other…etc.

2(d): The Fourth test deals with the arrangements entered with other than bonafide purposes. It mainly focuses on the manner in which arrangement entered into or carried out.

An Arrangement would qualify to be termed as “Impermissible avoidance arrangement” if it satisfies Primary Condition and Any of the four tests [2(a) to 2(d)]

Miscellaneous:-

• GAAR has an overriding effect on the other provisions of the Income Tax Act if any contradiction takes place. However if the Act specifically provides tax incentives to the assesses upon fulfilment of certain conditions then GAAR shall not apply.
• In the case of conflict between DTAA and GAAR it is DTAA which overrides the
  provisions of GAAR as the treaty goes beyond the boundaries of the country
• GAAR and SAAR may co-exist.
• GAAR Will not applicable for those arrangements and transactions which are undergoing Advance ruling under the Act.