- no. 500/43/2016-FT&TR-IV
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
Clarifications on implementation of GAAR provisions under the Income Tax Act, 1961
The provisions of Chapter X-A of the Income Tax Act, 1961 relating to General Anti-Avoidance Rule will come into force from 1St April, 2017. Certain queries have been received by the Board about implementation of GAAR provisions. The Board constituted a Working Group in June, 2016 for this purpose. The Board has considered the comments of the Working Group and the following clarifications are issued:
Question no. 1: Will GAAR be invoked if SAAR applies?
| Answer: | It is internationally accepted that specific anti avoidance provisions may not address all situations of abuse and there is need for general anti-abuse provisions in the domestic legislation. The provisions of GAAR and SAAR can coexist and are applicable, as may be necessary, in the facts and circumstances of the case. |
Question no. 2: Will GAAR be applied to deny treaty eligibility in a case where there is
compliance with LOB test of the treaty?
| Answer: | Adoption of 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 LOB in the treaty, there shall not be an occasion to invoke GAAR. |
Question no. 3: Will GAAR interplay with the right of the taxpayer to select or choose
method of implementing a transaction?
Answer: GAAR will not interplay with the right of the taxpayer to select or
choose method of implementing a transaction.
Question no. 4: Will GAAR provisions apply where the jurisdiction of the FPI is
finalised based on non-tax commercial considerations and such FPI has issued P-notes referencing Indian securities? Further, will GAAR be invoked with a view to denying treaty eligibility to a Special Purpose Vehicle (SPV), either on the ground that it is located in a tax friendly jurisdiction or on the ground that it does not have its own premises or skilled professional on its own roll as employees.
| Answer: | For GAAR application, the issue, as may be arising regarding the choice of entity, location etc., has to be resolved on the basis of the main purpose and other conditions provided under section 96 of the Act. GAAR shall not be invoked merely on the ground that the entity is located in a tax efficient jurisdiction. If the jurisdiction of FPI is finalized based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, GAAR will not apply. |
Will GAAR provisions apply to (i) any securities issued by way of bonus issuances so long as the original securities are acquired prior to 01 April. 2017 (ii) shares issued post 31 March, 2017, on conversion of Compulsorily Convertible Debentures, Compulsorily Convertible Preference Shares (CCPS), Foreign Currency Convertible Bonds (FCCBs), Global Depository Receipts (GDRs), acquired prior to 01 April, 2017; (iii) shares which are issued consequent to split up or consolidation of such grandfathered shareholding?
Grandfathering under Rule 10U(1)(d) will be available to investments 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. Shares brought into existence by way of split or consolidation of holdings, or by bonus issuances in respect of shares acquired prior to 1st April 2017 in the hands of the same investor would also be eligible for grandfathering under Rule 10U(1)(d) of the Income Tax Rules.
The expression “investments” can cover investment in all forms of instrument — whether in an Indian Company or in a foreign company, so long as the disposal thereof may give rise to income chargeable to tax. Grandfathering should extend to all forms of investments including lease contracts (say, air craft leases) and loan arrangements, etc.
Grandfathering is available in respect of income from transfer of investments made before 1st April, 2017. As per Accounting Standards, ‘investments’ are assets held by an enterprise for earning income by way of dividends, interest, rentals and for capital appreciation. Lease contracts and loan arrangements are, by themselves, not ‘investments’ and hence grandfathering is not available.
Question no. 7: Will GAAR apply if arrangement held as permissible by Authority for
Advance Ruling?
Answer: No. The AAR ruling is binding on the PCIT I CIT and the Income Tax
Authorities subordinate to him in respect of the applicant.
Question no. 8: Will GAAR be invoked if arrangement is sanctioned by an authority
such as the Court, National Company Law Tribunal or is in accordance with judicial precedents etc.?