Clarifications on implementation of GAAR provisions under the Income Tax Act, 1961 – reg.

The provisions of General Anti Avoidance Rule (GAAR) are contained in Chapter X-A of the Income Tax Act, 1961. The GAAR provisions shall be effective from assessment year 2018-19 onwards, i.e. financial year 2017-18 onwards. The necessary procedures for application of GAAR and conditions under which it shall not apply, have been enumerated in Rules 10U to 10UC of the Income-tax Rules, 1962.

Stakeholders and industry associations had requested for clarifications on implementation of GAAR provisions and a Working Group was constituted by CBDT to examine the issues raised. Accordingly, CBDT has issued the clarifications on implementation of GAAR provisions on 27th January, 2017.

Radhika Jain, Director, Grant Thornton Advisory Private Limited  on the clarifications on GAAR issued by CBDT today said that Clarifications on GAAR issued by CBDT today bring welcome certainty in some areas such as confirmation that grandfathering would apply to convertible instruments issued prior to 1 April 2017. An area of concern that remains is the invocation of GAAR where there is a SAAR such as LOB clause in treaties.

Clarification on GAAR Part 1

Amongst others, it has been clarified that if the jurisdiction of FPI is finalized based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, GAAR will not apply. GAAR will not interplay with the right of the taxpayer to select or choose method of implementing a transaction. Further, grandfathering as per IT Rules will be available to compulsorily convertible instruments, bonus issuances or split / consolidation of holdings in respect of investments made prior to 1st April 2017 in the hands of same investor. It has also been clarified that adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies and the same are required to be tackled through domestic anti-avoidance rules. However, if a case of avoidance is sufficiently addressed by Limitation of Benefits (LoB) provisions in the tax treaty, there shall not be an occasion to invoke GAAR.

Clarification issued on GAAR by CBDT Part 2

It has been clarified that if at the time of sanctioning an arrangement, the Court has explicitly and adequately considered the tax implications, GAAR will not apply to such an arrangement. It has also been clarified that GAAR will not apply if an arrangement is held as permissible by the Authority for Advance Rulings. Further, it has been clarified that if an arrangement has been held to be permissible in one year by the PCIT/CIT/Approving Panel and the facts and circumstances remain the same, GAAR will not be invoked for that arrangement in a subsequent year.

Clarification issued on GAAR by CBDT Part 3

The proposal to apply GAAR will be vetted first by the Principal Commissioner of Income Tax / Commissioner of Income Tax and at the second stage by an Approving Panel headed by a judge of High Court. The stakeholders have been assured that adequate procedural safeguards are in place to ensure that GAAR is invoked in a uniform, fair and rational manner.

Source- Press release by Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes, New Delhi, 27th January, 2017.

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