In India GAAR provisions were first introduced in direct tax code 2009. The second draft of DTC which was introduced in the Indian Parliament in August 2010 also contained the GAAR provisions with certain modifications. Introduction of GAAR in order to counter aggressive tax avoidance scheme was sent for review of GAAR panel.

The reasons for introducing GAAR in India as explained in memorandum to the Finance Bill 2012 was the question of “substance over form” which has consistently arisen in the implementation of taxation law. Various judicial pronouncements have given contradictory judgements over the sanctity of form over substance or vice-versa. GAAR provisions in nutshell codifies judicial doctrine of substance over form under the legal tax system in India.

Applicability of GAAR provisions has been further deferred to another 2years by Finance Bill 2015 and accordingly it is applicable wef 1.4.2017.

Overview of Indian GAAR provisions

In India, following provisions of IT Act, 1961 deal with GAAR

Sections 95 empowers the tax authority, to declare an arrangement which an assessee has entered into as “Impermissible avoidance arrangement”. Tax authority has also power to declare a step in, or a part of, the arrangement as impermissible avoidance arrangement, this term has been defined in section 96 of the Act and the term arrangement has been defined vide section 102.

Section 102(1) defines “arrangement”, means any step in, or part of whole of, any transaction, operation, scheme, agreement or understanding whether enforceable or not and includes alienation of property in such transaction, operation, scheme, agreement or understanding. This section undoubtedly has very wide scope.

Section 96 of the Act defines impermissible avoidance arrangement, the arrangement in impermissible if its main purposes is to obtain tax benefit (main-purpose test) and it satisfies one or more of the conditions.

1. It creates rights or obligations which are not ordinarily created between persons dealing on arm’s length.
2. It results directly or indirectly in misuse of provisions of the Act.
3. It lacks commercial substance in whole or in part.
4. It has been executed in manner not ordinarily employed for bona fide purpose.

Indian GAAR provisions are generically worded leaving wide scope of subjective interpretations and giving wide powers to tax authorities. The onus to prove that arrangement is not impermissible is first on the taxpayer.

Section 97 elaborates the circumstances in which arrangement to lack commercial substance in explained.

Section 98 prescribes that if an arrangement is declared as impermissible, there would be denial of tax benefit or denial of tax treaty benefit. Further section 90(2A) of Act specifically provides that GAAR provisions will over-ride tax treaty provisions.

Section 101 provides through rules 10U non-applicability of GAAR provisions. It says that an arrangement where the tax benefit arising in aggregate to all concerned parties does not exceed 3 crore, GAAR provisions will not apply. GAAR is also not applicable to FII, certain non-residents in relation to investment made by them in off shore derivative instruments. It also provide that GAAR don’t have any implications in respect of income arising by way of transfer of investment made before 1st April 2017.

A recent clarification has come vide Circular No. 500/43/2016-FT&TR-IV dated 27/01/2017 stating that grandfathering under Rule 10U(1)(d) will be available to investment made before 1st April 2017 in respect of instruments compulsorily convertible from one form to another, at terms finalized at the time of issue of such instruments. Bonus shares issued in respect of shares acquired prior to 1st April 2017 in hands of same investor would also be available for grand fathering.

Concluding Thoughts:-

GAAR provisions will not apply where SAAR is applicable. Timely notification of GAAR implementation would ensure reduction in tax-avoidance only if government ensures that it is not a tool to harass assessee and would increase ease of doing business. Hopefully with the Budget coming up, we would see some highlight on GAAR provisions.