{"id":3803,"date":"2017-04-04T13:53:12","date_gmt":"2017-04-04T08:23:12","guid":{"rendered":"http:\/\/www.itatonline.org\/articles_new\/?p=3803"},"modified":"2017-04-04T13:53:12","modified_gmt":"2017-04-04T08:23:12","slug":"understanding-general-anti-avoidance-rules-gaar-part-1","status":"publish","type":"post","link":"https:\/\/itatonline.org\/articles_new\/understanding-general-anti-avoidance-rules-gaar-part-1\/","title":{"rendered":"Understanding General Anti-Avoidance Rules (&#8216;GAAR&#8217;): Part 1"},"content":{"rendered":"<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.itatonline.org\/articles_new\/wp-content\/uploads\/Paras-Dawar.jpg\" alt=\"Paras-Dawar\" width=\"79\" height=\"100\" class=\"alignleft size-full wp-image-2587\" \/><\/p>\n<p><strong>The provisions of Chapter X-A of the Income-tax Act, 1961, which prescribe General Anti-Avoidance Rules (&#8216;GAAR&#8217;), have been made applicable to all transactions entered into on and from 1st April 2017. The provisions are complicated and are likely to lead to numerous controversies and litigation between the taxpayer and the income-tax department. CA Paras Dawar has explained the salient aspects of the legal provisions in a simple and easy-to-understand format<\/strong><\/p>\n<p><strong>1. <u>Introduction<\/u><\/strong><\/p>\n<p>Parliament  by Finance Act, 2012 inserted Chapter X-A under Income Tax Act, 1961 (&lsquo;Act&rsquo;)  which provided General Anti-Avoidance Rules (&lsquo;GAAR&rsquo;) to be applicable from  April 1, 2012. However, the protest from industry which feared arbitrary usage  of power by tax officers forced the government to defer its implementation and  to constitute an Expert Committee under the chairmanship of Dr.Parthasarathi Shome  to frame guidelines for GAAR after consultations with all the stakeholders. Following  the report of Dr.Shome Committee, various amendments were carried out under the  tax law and clarifications were provided by CBDT through issue of Circular.  With effect from April 1, 2017, GAAR have finally become effective.<\/p>\n<p><!--more--><\/p>\n<p>In  this article, an attempt has been made to decipher the complicated provisions  of the Act dealing with GAAR. <\/p>\n<div style=\"position:relative;height:0;padding-bottom:56.25%\"><iframe loading=\"lazy\" src=\"https:\/\/www.youtube.com\/embed\/S94-mPSfbKQ?ecver=2\" width=\"640\" height=\"360\" frameborder=\"0\" style=\"position:absolute;width:100%;height:100%;left:0\" allowfullscreen><\/iframe><\/div>\n<p><strong>2. <u>Tax  Avoidance <\/u><\/strong><\/p>\n<p>Tax  planning and tax avoidance, although legal ways to reduce taxes, are separated  by a very thin line which at times is indistinguishable. While tax planning involves  minimizing tax outgo by use of fiscal incentives available under tax  legislation. Tax Avoidance on the other hand involves arranging affairs  predominantly \/ mainly to obtain tax advantages without breaching the law. It involves  the legal exploitation of tax laws to one&lsquo;s own advantage.Taxpayers consider it  their legitimate right to arrange their affairs in a manner as to pay the least  tax possible. However, tax authorities internationally consider aggressive tax  planning schemes by taxpayers as colourable device to evade taxes.<\/p>\n<p>  <strong>3. <u>GAAR  Applicability <\/u><\/strong><\/p>\n<p>Section  95 of the Act is the basic section that provides for declaring an arrangement  entered into by a tax payer as an impermissible avoidance arrangement. It may  be noted that section 95 of the Act overrules the entire Act and shall have  operation notwithstanding anything contained in the Act.<\/p>\n<p>Even in  cases where relief is available under Double Taxation Avoidance agreement  (&lsquo;DTAA&rsquo;), the tax payer will still be continued by the provisions of GAAR by  virtue of section 90(2A) of the Act. CBDT vide Circular No. 7 of 2017, dated  27-1-2017further clarified that 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. If a case of avoidance is  sufficiently addressed by Limitation of Business (&lsquo;LOB&rsquo;) in the treaty, there  shall not be an occasion to invoke GAAR.<\/p>\n<p>Rule  10U of the Income Tax Rules, 1962 (&lsquo;Rules&rsquo;) restrict applicability of GAAR only  in cases where tax benefit in the relevant assessment year arising, in  aggregate, to all the parties to the arrangement does exceed a sum of rupees  three crore.<\/p>\n<p>  <strong>4. <u>What  is impermissible avoidance arrangement?<\/u><\/strong><\/p>\n<p>The  phrase &#8216;impermissible avoidance arrangement&#8217; has been defined under section  96(1) of the Act. For a transaction to be declared &#8216;impermissible avoidance arrangement&#8217;,  it must satisfy below mentioned twin conditions cumulatively: &#8211;<\/p>\n<p><strong><u>Condition  1:<\/u><\/strong> The main  purpose of the arrangement is to obtain a tax benefit (Main purpose test)<\/p>\n<p><strong><u>Condition  2:<\/u><\/strong>The arrangement  should have one or more below mentioned specified tainted elements (Tainted  element test) :- <\/p>\n<p>  (a) The  arrangement creates rights, or obligations, which are not ordinarily created  between persons dealing at arm&#8217;s length;<\/p>\n<p>  (b) The  arrangement results, directly or indirectly, in the misuse, or abuse, of the provisions  of the Act;<\/p>\n<p>  The  arrangement lacks commercial substance or is deemed to lack commercial substance  under section 97 of the Act, in whole or in part;<\/p>\n<p>  (c) The  arrangement is entered into, or carried out, by means, or in a manner, which  are not ordinarily employed for <em>bona fide<\/em> purposes.<\/p>\n<p>Section 96(2) of the Act makes a  rebuttable presumption that an arrangement shall be presumed to have been  entered for main purpose of obtaining tax benefit where main purpose of even a  single step or of part of that arrangement, isto obtain a tax benefit,  notwithstanding the fact that main purpose of whole arrangement is not to  obtain tax benefit.<\/p>\n<div style=\"position:relative;height:0;padding-bottom:56.25%\"><iframe loading=\"lazy\" src=\"https:\/\/www.youtube.com\/embed\/a9lVTt5sv-8?ecver=2\" width=\"640\" height=\"360\" frameborder=\"0\" style=\"position:absolute;width:100%;height:100%;left:0\" allowfullscreen><\/iframe><\/div>\n<p>  <strong>5. <u>Arrangement  lacking commercial substance<\/u><\/strong><\/p>\n<p>Section  97(1) of the Act provides certain situations wherein an arrangement shall be  deemed to lack commercial substance. These situations are:<\/p>\n<p>  (a) <u>Where  substance of the arrangement is inconsistent with, or differs significantly  from its form.<\/u><\/p>\n<p>Clause  (a) of section 97(1) codifies the <strong>doctrine of substance over form<\/strong>. It  implies that where substance of an arrangement is different from what is  intended to be shown by the form of the arrangement, then tax consequence of a  particular arrangement should be assessed based on the &lsquo;substance&rsquo; of what took  place. In other words, it reflects the inherent ability of the law to remove  the corporate veil and look beyond form.<\/p>\n<p> (b) <u>If  the arrangement involves &#8211;<\/u><\/p>\n<p>(i)  <u>Round Trip Financing<\/u><\/p>\n<p>Section 97(2) of the Act defines round  trip financing to include any arrangement in which, through a series of  transactions,funds are transferred among the parties to the arrangement and such  transactions do not have any substantial commercial purpose other than  obtaining the tax benefit.<\/p>\n<p>(ii)  <u>An accommodating party<\/u><\/p>\n<p>Section 97(3) of the Act defines an accommodating party  to be a party which is included in an arrangement mainly for obtaining tax  benefit to the taxpayer. Such party may or may not be a connected party to the  taxpayer.<\/p>\n<p>(iii)  <u>Elements that have effect of  offsetting or cancelling each other<\/u><\/p>\n<p>Item (iii) of clause (b) deems an  arrangement, which includes elements thathave effect of offsetting or  cancelling each other to lack commercial substance.<\/p>\n<p>(iv)   <u>Transaction conducted through one or  more persons which disguises the value, location, source, ownership or control  of funds <\/u><\/p>\n<p>Item (iv) of clause (b) deems an arrangement, which  disguises value, source or location etc. of funds, to lack commercial substance.<\/p>\n<p>(c)   <u>Where  arrangement involves the location of an asset or of a transaction or of the  place of residence of any party and such location is without any  substantial commercial purpose.<\/u><\/p>\n<p>It  means if a particular location is selected for an asset or transaction or  residence, and such selection has no substantial commercial purpose, then such  arrangement shall be deemed to lack commercial substance.<\/p>\n<p>(d)  <u>Where  arrangement does not effect significantly the business risks or net cash flows  of any party to the arrangement and only attributes tax benefits<\/u><\/p>\n<p>Clause  (d) of section 97(1) of the Act was inserted on recommendation of Dr.Shome  Committee. It implies that besides having a commercial purpose, the taxpayer  should also have commercial substance in the arrangement, which mean change  in economic position of the taxpayer by altering the business risks or net  cash flow to him.<\/p>\n<p> 6. <strong><u>Consequences  of impermissible avoidance arrangement<\/u><\/strong><\/p>\n<p>As per  section 98(1), if an arrangement is declared to be an impermissible avoidance  arrangement, then the consequences may include denial of taxbenefit or a  benefit under a tax treaty. The consequence shall be determined, in such manner  as is deemed appropriate, in the circumstances of the case. Certain  illustrations of the manner have been provided, namely:&mdash;<\/p>\n<p>(a)  disregarding,  combining or recharacterising any step in, or a part or whole of, the  impermissible avoidance arrangement;<\/p>\n<p>(b)  treating  the impermissible avoidance arrangement as if it had not been entered into or  carried out;<\/p>\n<p>(c)  disregarding  any accommodating party or treating any accommodating party and any other party  as one and the same person;<\/p>\n<p>(d)  deeming  persons who are connected persons in relation to each other to be one and the  same person for the purposes of determining tax treatment of any amount;<\/p>\n<p>(e)  reallocating  amongst the parties to the arrangement&mdash;<\/p>\n<p> (i) any  accrual, or receipt, of a capital nature or revenue nature; or<\/p>\n<p>(ii)  any  expenditure, deduction, relief or rebate;<\/p>\n<p>(f)  treating&mdash;<\/p>\n<p> (i) the  place of residence of any party to the arrangement; or<\/p>\n<p>(ii)  the  situs of an asset or of a transaction,<\/p>\n<p>at  a place other than the place of residence, location of the asset or location of  the transaction as provided under the arrangement; or<\/p>\n<p> (g) considering  or looking through any arrangement by disregarding any corporate structure.<\/p>\n<p>7.  <strong><u>Conclusion<\/u><\/strong><\/p>\n<p>GAAR  has already become effective from April 1, 2017. In this article, an attempt  has been made to comprehend the legal aspects related to GAAR. Another equally  important area deals with procedural aspects in implementation of GAAR. The  procedural aspects of GAAR along with CBDT&rsquo;s clarifications through its  Circular would be dealt by the author in second series of this article.<\/p>\n<p><em>(The  author is a practicing Chartered Accountant based in Delhi and can be reached  at paras@parasdawar.com or +91 9711107317) <u> <\/u><\/em><\/p>\n<p><em>&nbsp;<\/em><\/p>\n<table width=\"100%\" border=\"1\" cellpadding=\"5\" cellspacing=\"0\" bgcolor=\"#FFFFCC\">\n<tr>\n<td><strong>Disclaimer: <\/strong>The  contents of this document are solely for informational purpose. It does not  constitute professional advice or a formal recommendation. While due care has  been taken in preparing this document, the existence of mistakes and omissions  herein is not ruled out. Neither the author nor itatonline.org and its  affiliates accepts any liabilities for any loss or damage of any kind arising  out of any inaccurate or incomplete information in this document nor for any  actions taken in reliance thereon. No part of this document should be  distributed or copied (except for personal, non-commercial use) without  express written permission of itatonline.org<\/td>\n<\/tr>\n<\/table>\n","protected":false},"excerpt":{"rendered":"<p>The provisions of Chapter X-A of the Income-tax Act, 1961, which prescribe General Anti-Avoidance Rules (&#8216;GAAR&#8217;), have been made applicable to all transactions entered into on and from 1st April 2017. The provisions are complicated and are likely to lead to numerous controversies and litigation between the taxpayer and the income-tax department. CA Paras Dawar has explained the salient aspects of the legal provisions in a simple and easy-to-understand format<\/p>\n<div class=\"read-more\"><a href=\"https:\/\/itatonline.org\/articles_new\/understanding-general-anti-avoidance-rules-gaar-part-1\/\">Read more &#8250;<\/a><\/div>\n<p><!-- end of .read-more --><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[1],"tags":[10,13,8,12,11,9],"class_list":["post-3803","post","type-post","status-publish","format-standard","hentry","category-articles","tag-10","tag-ca-paras-dawar","tag-finance-act-2017","tag-gaar","tag-general-anti-avoidance-rules","tag-income-tax-act"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/posts\/3803","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/comments?post=3803"}],"version-history":[{"count":0,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/posts\/3803\/revisions"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/media?parent=3803"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/categories?post=3803"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/tags?post=3803"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}