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Key Takeaways From GAAR Clarifications

13 January 2017

An important clarification in relation the administration of the General Anti-avoidance Rules (GAAR) provisions is released today, on Jan 27, 2017. The clarifications are issued in relation to the queries received by the Central Board of Direct Taxes (tax administration authority in India). The clarification deals with 16 questions, which is a culmination of different apprehensions of the tax payers at large. This Alert is prepared with a view to provide a perspective on some of the important aspects of the clarification.

  • Question 1: GAAR and Specific Anti-avoidance Rules (SAAR) can co-exist. As a result, subjectivity in administration of GAAR provisions cannot be ruled out.
  • Question 2: If a case of avoidance is sufficiently addressed by the Limitation of Benefits (LoB) Clause in the tax treaty, GAAR will not be invoked. It needs to be seen as to what is the meaning of “case of avoidance is sufficiently addressed”? Does this leave room for interpretation of LoB clause, subject to GAAR?
  • Question 4: If the jurisdiction of FPI is based on non-tax commercial considerations and main purpose of arrangement is not to obtain tax benefit, GAAR will not apply. The test of ‘non-tax commercial consideration’ is at best, frogs in boiling water. Absence of objective condition will impact the ability of foreign investors to have predictable tax administration.
  • Question 5: Grandfathering will be available to investments made before April 1, 2017 in respect of convertible instruments as also shares issued consequent to split, consolidation of holdings or bonus issue of grandfathered shareholding. This is a welcome announcement as instruments which are compulsorily convertible, are protected. However, there are two important conditions, viz, the conversion is at terms finalized at the time of issue of such instruments and only the income from the transfer of the original instrument and converted instrument is protected. The question remains as to whether shares received on amalgamation or demerger, will also be protected as received on consolidation? This also raises hope that clarification in relation to amended treaties of Mauritius, Singapore may also be on the similar lines as that of GAAR clarification.
  • Question 7, 8 and 15: GAAR will not apply if the arrangement is held as permissible by Authority for Advance Ruling. Similarly, if Commissioner/Approving Panel has held arrangement as permissible in one year, then following principle of consistency and facts and circumstances remaining the same, GAAR will not be invoked for that arrangement in subsequent year. However, the fact that GAAR may apply if the Court or National Company Law Tribunal (NCLT) has not explicitly and adequately considered the tax implications is a cause of concern as Court or NCLT generally focuses on creditors interest while sanctioning an arrangement.
  • Question 13 and 14: Computation of the tax benefit is based on taxation of entire arrangement and in relation to each year. This would, in effect, permit the contradictory entries to be set off leading to net tax effect, even though there is no corresponding adjustment in the hands of other tax payer.

Release of two important clarifications, one on guiding principles for determination of place of effective management (PoEM) and another on GAAR, a few days before announcement of the Budget proposals raises the expectation that the eagerly awaited clarification on the amended tax treaty with Mauritius and others, may also be issued to put to rest any anxiety on implementation of tax policies from April, 2017.