Millennium Post

Govt notifies implementation of GAAR rules from April 2016

The government has notified the controversial anti-avoidance tax rules, which will be implemented from April 2016 and apply to business arrangements with a tax benefit exceeding Rs 3 crore.

The General Anti Avoidance Rules (GAAR) provisions will come into force from 1 April, 2016, the Central Board of Direct Taxes (CBDT) said in a notification dated 23 September.

The GAAR provisions were introduced in the 2012-13 Budget by then Finance Minister Pranab Mukherjee to check tax avoidance and were slated to come into effect from April 1, 2014. The proposal generated controversy, with investors apprehensive about harassment by tax authorities.
To soothe the nerves of jittery investors, Finance Minister P Chidambaram in January announced the postponement of the implementation of Chapter 10A of the Income-Tax Act (dealing with GAAR) by two years to 1 April, 2016.

According to the notification, GAAR would be applicable to foreign institutional investors that have not taken the benefit of an agreement under Section 90 or Section 90A of the I-T Act or Double Taxation Avoidance Agreement (DTAA).
The GAAR provisions would not apply to business arrangements where the 'tax benefit in the relevant assessment year arising, in aggregate, to all parties to the arrangement does not exceed a sum of Rs 3 crore.

'Where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax shall be determined with reference to such part only,' the notification said.

Besides, before invoking the GAAR provisions, the assessing officer has to 'issue a notice in writing to the assessee seeking objections, if any, to the applicability of provisions of Chapter X-A.

The notification said investments made by a non-resident through foreign institutional investors (FIIs) would not be covered by the GAAR provisions.

'Stock markets will have a lot to cheer as FIIs which do not seek to avail of treaty benefits will not be subjected to GAAR. Similarly, investment in participatory notes will not be subject to GAAR,' Deloitte Haskins & Sells Partner N C Hegde said.
Under the modified norms, a tax official needs to issue a show-cause notice, with reasons, to invoke GAAR provisions and also has to give an opportunity to an assessee to explain whether an arrangement was 'impermissible.'

A business arrangement can be termed 'impermissible' if its main purpose is to obtain tax benefit. Under the original GAAR proposals, the anti-tax avoidance provisions could be invoked 'if one of the purposes' was to obtain tax benefit.
While deferring the GAAR provisions in January, Chidambaram had said: 'No investor should now have any apprehension about his investments in India. Only those arrangements, which have been made for the purpose of tax avoidance, will be brought under GAAR.'
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