Govt clarifies on implementation of GAAR provisions from 2017-18 fiscal

The General Anti Avoidance Rule (GAAR) provisions will come into force from the coming financial year 2017-18 (Assessment Year 2018-19) onwards, and 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 the Central Board of Direct Taxes (CBDT) has constituted a working group to examine the issues raised. Accordingly, CBDT has issued the clarifications on implementation of GAAR provisions on Friday.  

Amongst others, it has been clarified that if the jurisdiction of FPI is finalised based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, then GAAR will not apply. GAAR will have no 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 1 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.

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.

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.