Under GAAR, an arrangement entered into by a taxpayer may be declared to be an impermissible avoidance arrangement if the main purpose of the arrangement is to obtain a tax benefit (as specified under Indian tax law). Primarily, the provisions of the GAAR could be invoked in respect of the arrangement that:
- Creates rights or obligations that are not ordinarily created between persons dealing at arm’s length
- Results, directly or indirectly, in the misuse or abuse of the provisions of the Indian tax law
- Lacks commercial substance or is deemed to lack commercial substance, in whole or in part
- Is entered into or carried out by means or in a manner that is not ordinarily employed for bona fide purposes
Exceptions when GAAR not applicable
The rules for application of GAAR, as “notified,” provide certain exceptions. These exceptions clarify that GAAR will not apply to:
- An arrangement when the tax benefit arising to all the parties to the arrangement in the relevant Indian tax year does not exceed INR 30 million in the aggregate (approximately U.S. $500,000, based on an exchange rate US $1 = INR 60)
- A foreign institutional investor (FII) that (1) is a taxpayer (assessee) under the Indian domestic tax law; (2) has not asserted a benefit under a tax treaty; and (3) has invested in listed securities, or unlisted securities, as specified
- A non-resident person who has invested by way of offshore derivative instruments or otherwise, directly or indirectly, in an FII
- Any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of investment before 30 August 2010
Effective date - Caution
The GAAR will apply to any arrangement, regardless of the date on which it has been entered into, in respect of the tax benefit obtained from an arrangement on or after 1 April 2015.
The procedural aspects for invoking GAAR provide that the basis and reasons for invoking GAAR must be clearly mentioned in an effort to bring any particular arrangement under the rules.
Also, there are indications that necessary safeguards have been built in, when the matters are to be approved by a senior Indian Revenue official (Commissioner of Income-tax), before any matter is referred to the GAAR Approving Panel for final consideration.
Time limits for different steps have also been proscribed, to provide a time-bound conclusion for the issues raised.
Certain areas under GAAR, for example, may affect investments by U.S. and other foreign investors. For example, there may be questions concerning the applicability of the rules vis-à-vis income tax treaty benefits—e.g., in situations when the tax treaty provides for limitation of benefit clause.
Foreign investors / foreign companies that have made investments or are doing business in India need to review their existing arrangements, investment structures, etc., to consider whether they are sufficiently robust to withstand a potential challenge under the new GAAR regime.