Вы находитесь на странице: 1из 4

CONTENTS

SALIENT FEATURES
Monetary threshold for invoking GAAR to be prescribed
Statutory forms prescribed for initiating the procedure will ensure compliance with
the principals of natural justice
Time lines prescribed for initiating the procedure
Initially one approving panel for deciding the case would be set up in Delhi
GAAR will not be invoked against any non resident investor if dealing through an
FII. It will be invoked against the FII only if it chooses to take benefits available
under the tax treaty.
GAAR not to apply retrospectively, but only in respect of income accruing or arising on or
after 1st April 2013
GAAR will not apply if the transaction is covered by a specific provision (SAAR), except
when it involves abuse of such SAAR
Definition of connected person narrowed down to include only associated enterprises
(section 92A), relatives (section 56) and related parties (section 40A(2)(b).
GAAR not applicable to the entire transaction but only to the part that is impermissible
GAAR seeks to address cases involving tax avoidance; and not tax evasion (expressly
prohibited) or tax mitigation (within the law)
Onus to establish impermissible avoidance arrangement shifted fromtax payer to the
tax authorities

SALIENT FEATURES
REPRESENTATION
JULY 2012
www.bdoindia.co.in
GENERAL ANTI
AVOIDANCE RULES (GAAR)
OVERVIEWOF CBDT DRAFT GUIDELINES
IMPACT ON FOREIGN INSTITUTIONAL
INVESTORS & PARTICIPATORY NOTES
The draft guidelines have rejected the suggestion of the FII representatives to keep capital
market transactions outside the purviewof GAAR. Further, the suggestion to apply a flat
rate of tax on FII gains was also rejected on account of no such provision being there in the
current tax provisions
It has been suggested that safe harbor could be provided if the FIIs pay tax as per the
domestic tax laws in India. In this case GAAR would not be applicable to the FII as well as
the non resident investor
However, if the FII selects to take benefit of the tax treaty, GAAR provisions would be
applicable to the FII, but it will not be applicable to its non resident investor
The guidelines have specifically clarified that GAAR provisions would not be made
applicable to Participatory Notes, the Offshore Derivative Instruments(ODI) &thus has
pacified their fear
IMPACT ON FOREIGN
INSTITUTIONAL INVESTORS
& PARTICIPATORY NOTES
ILLUSTRATIVE CASES

OURCOMMENTS
Abuseof taxprovisions
Lackof commercial substance
Applicabilityof SAARover GAAR
Cases involvingtaxoncapital gains
2
An arrangement involving borrowing of money for investment in a
connected party at a significantly higher premium, such capital which
was then moved back to another connected party of the lender, and then
the investment was sold of at a loss to claim set off of losses, is lacking
commercial substance and GAAR would be invoked (Example 21)
ILLUSTRATIVE CASES - ABUSE OF
TAX PROVISIONS
Claimof tax benefits for conducting manufacturing activities in an
underdeveloped area is case of tax mitigation & is permissible under the
legislation (Example 1)
However, if the taxpayer misuses such beneficial provisions by diverting
production from a taxable unit to a tax-exempt unit then GAAR would be
invoked (Example 2)
If the taxpayer avoids distribution of profits to evade dividend distribution
tax; and repatriates such profits by way of buyback of shares from a
shareholder in a jurisdiction that does not result into taxation of capital
gains under the treaty, the arrangement will be considered as impermissible
and GAAR would be invoked (Example 12). This example is similar to the
AAR ruling in the case of OTIS Elevators
An arrangement involving finalizing loan fromone country and assigning it
to another country to avoid withholding provisions is an tax avoidance
arrangement to be subjected to GAAR provisions (Example 14)
An arrangement involving splitting of a transaction into several parts with
the intention to not exceed the threshold limit for taxability, is a tax
avoidance arrangement to be subjected to GAAR provisions (Example 15)
Capital gains arising on sale of preference shares received in lieu of salary to
reduce overall tax, can be re-characterised as salary by invoking GAAR
(Example 19)
ILLUSTRATIVE CASES LACKOF
COMMERCIAL SUBSTANCE
Lease or purchase of asset is a business choice to which GAAR provisions
would not be applicable. However, circular leasing is an arrangement
devoid of commercial substance and GAAR would be invoked (Example 6)
Stock market transactions entered into between related parties or between
unrelated parties through a broker, for exchange of losses with gains, is an
impermissible avoidance agreement to which GAAR can be applied
(Example 9)
Disguising business transactions conducted in a taxable jurisdiction as being
undertaken in a lowtax jurisdiction so as to avoid taxation, is a transaction
lacking commercial substance & hence, GAAR would be invoked
(Example 17)
Transfer of receivables to a connected party for a negligible consideration
so as to reduce overall tax outgo will be considered as a colourable device
and GAAR would be invoked (Example 20)
ILLUSTRATIVE CASES
APPLICABILITYOF SAAROVERGAAR
Indian company sets up holding company in a lowtax jurisdiction. The
holding company receives dividend from its subsidiaries, which is not
repatriated to India. GAAR not to apply since Controlled Foreign
Company (CFC) rules are proposed in DTC (Example 4)
Merger of loss making company into a profit making one, resulting in loss
set-off, lower net profit and lower tax for the merged company. GAAR
not to apply since provision related to merger and amalgamation already
contain specific anti-avoidance safeguards under the Act (Example 5)
A company raises funds from an unconnected party through borrowings
when it could have issued equity. GAAR will not apply since raising of
funds should be left to commercial judgement of the company. However
for interest payment made to connected parties Transfer Pricing
provisions would be applicable. Further, GAAR may be invoked for
payments made to connected parties, depending upon the source of
funds and location of the connected party (Example 7)
A large corporate company creates a service company to manage its non-
core business. Service company charges each company on a cost plus
basis. GAAR not to apply since transaction specifically covered by
transfer pricing rovision( Example 8)
Even if treaty benefits are denied under the Limitation of Benefit clause
of the tax treaty, GAAR can still be applied if it is arrangement for only
claiming treaty benefits and lacks economic substance (Example 16)
ILLUSTRATIVE CASES INVOLVING
TAXONCAPITAL GAINSTAX
Foreign companies investing in India through a holding company situated
in lowtax jurisdiction .GAAR not to apply provided the Foreign company
has commercial substance in its structure (Example 3)
A foreign company interposed another company for investing in India to
take advantage of treaty benefit. GAAR to apply since direct transfer of
shares by the foreign company would have attracted capital gains in India
read with the relevant treaty of foreign companys residence. The case is
similar to the Bombay High Court decision in the case of Aditya Birla
Nuvo Ltd. (Example 10)
A foreign company routes funds in India through a country X where
capital gains are taxable at minimum rate and where India-X tax treaty
provides for residence based taxation of capital gains. GAAR will apply
since the real and beneficial ownership is with the foreign company
(Example 11)
An Indian Company is voluntarily liquidated and its assets are transferred
to its holding companies in a jurisdiction that levies lower tax on capital
gains. GAAR will apply if the arrangement is to misuse or abuse the tax
provisions (Example 13)
A foreign company routes funds in India through a country X where
capital gains are taxed at a beneficial rate and India- X tax treaty provides
for residence based taxation of capital gains. GAAR to apply since by
routing funds through Country X, payment of capital gains tax is avoided
and the company does not have substantive commercial substance in
Country X (Example 18)
ILLUSTRATIVE CASES
General Anti Avoidance Rules (GAAR)
The draft guidelines include around 21 examples analysing the applicability of
GAAR. These examples provide a insight about how the tax authorities can
interpret whether acaseinvolvestaxavoidance, taxevasionor taxmitigation.
For the sake of simplicity, we have attempted to categorise these examples
under the following four broad heads based on the essence of the interpretation
laiddownintheguidelines:
The shift in onus to prove applicability of GAAR fromthe tax payer to the
tax authority has addressed a major concern. Further, measures relating to
forms, time lines & approving panel have brought in a feel of transparency.
However, considering the manner of interpretation given in the examples, it
prima facie appears that there is no change in the intensity of GAAR. Rather,
it is becoming more apparent that even at the slightest hint of tax abuse
GAAR would be invoked.
By delaying the introduction of GAAR, the Government has provided a nine
month windowto the tax payer to introspect & analyse the existing
business structures in light of these guidelines. The 21 examples given in the
guidelines provide a glimpse of howthe tax authorities would interpret the
business transactions to apply GAAR.
The only shield the tax payer can prepare is to do a vigorous analysis of the
existing transaction structure & assess the impact. The key is to prepare
robust documentation to highlight the business purpose of the transaction
& any gains emanating therefrom
The guidelines state that GAAR will not apply to tax mitigation cases but
only in case of tax avoidance. However, there is a thin line that
demarcates the two, leaving the tax payer in a state of uncertainty
about the interpretation of the tax authorities. Further, considering the
history of tax litigation in India, there is likely to be increase in burden of
tax compliance on the tax payer
The intention to introduce GAAR is to broaden the tax base. However,
the provisions portray a scenario where the tax base is abused to the
extent of hurting the already fragile economic environment.
Nevertheless, it is always beneficial to be on the safer side of law.
3 General Anti Avoidance Rules (GAAR)
OURCOMMENTS
REPRESENTATION
These draft guidelines are currently at a proposal stage and the Finance Secretary
has invited comments / suggestions of the stakeholders. You can e-mail your
valuable comments / suggestions to us on on or before 15th
July 2012. We shall forward the same through an appropriate forum.
gaar@bdoindia.co.in
REGISTEREDOFFICE :
42, Free Press House, 215, Nariman Point, Mumbai-400021
Tel: +91 (22) 6132 6999 Fax: +91 (22) 2285 6237 Website: www.bdoindia.co.in
AHMEDABAD
BENGALURU (BANGALORE)
CHENNAI (MADRAS)
703, Venus Atlantis, 100 Ft Road,
Corporate Road Prahlad Nagar,
Ahmedabad - 380 015
Tel: +91 (79) 4032 0441/4032 0442
No. 45, 1st Floor, 2nd Main, Sankey
Road, (Above Indian Bank) Lower
Palace Orchards,
Bengaluru - 560 003
Tel: +91 (80) 6454 2545/6454 2546
5B, A Block, 5th Floor, Mena
Kampala Arcade, New No 18 & 20,
Old No 113/114, Theyagaraya Road,
T. Nagar,
Chennai 600 017
Tel: +91 (44) 4213 2024 / 4554 4143
Fax: +91 (44 )4354 6876
COIMBATORE
HYDERABAD
JAIPUR
Shree Shanmugappriya, 2nd Floor,
454, Ponnaiyan Street,Crosscut Road,
Gandhipuram, Coimbatore 641 012
Tel: +91 (422) 2237793 / 2238793
Fax: +91 (422) 2233793
Raja Pushpa House 3rd floor Plot No-34,
Silicon Valley, Madhapur,
Hyderabad 500 081
Tel: +91 (40) 42007771/0
Fax: +91 (40) 42007772
Manish Mansion, Plot No. 247, 1st Floor
Frontier Colony, Near Punjab National
Bank,Adarsh Nagar,Raja Park, Jaipur -
302 004
Tel: +91 (141) 2604 743
KOLKATA (CALCUTTA)
MUMBAI (BOMBAY)
NEW DELHI
PUNE
Geetanjali Apartments, Suite 7G,
7th Floor, 8B, Middleton Street,
Kolkata - 700 071.
Tel: +91 (33) 3201 6298/22298936
Fax: +91 (33) 2226 4140
701, Leela Business Park,
Andheri-Kurla Road,
Andheri (E), Mumbai - 400 059
Tel: +91 (22) 6672 9999
Fax: +91 (22) 6672 9777
3rd Floor, 52-B, Okhla Industrial Estate
New Delhi - 110 020
Tel: +91 (11) 4711 9999
Fax: +91 (11) 4711 9998
C-10,Godrej Eternia,
Old Mumbai Pune Highway,
Wakdewadi Pune- 411005
Tel: +91 (020) 6729 9500/501
Fax: +91 (020) 6729 9555
Disclaimer: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot
be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific
professional advice. Please contact BDOConsulting Pvt. Ltd. to discuss these matters in the context of your particular circumstances. BDOConsulting Pvt. Ltd., its
partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on
the information in this publication or for any decision based on it.
BDOConsulting Private Limited, a private limited company incorporated in India, is a member of BDO International Limited, a UK company limited by guarantee,
and forms part of the international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Вам также может понравиться