Impact of Gaar

Topics: Tax, Tax haven, International taxation Pages: 7 (1916 words) Published: May 4, 2013
A Research Paper on

General Anti-Avoidance Rule (GAAR)

Impacts and Implications
As a Term Paper for 1st Quad ester for Post Graduate Program in Financial Markets

Presented by: Mr. Sumit Gupta Enrollment No: NF121329 Email id:

GAAR – Impacts and Implications


I would take this opportunity to extend my gratifications to one individual who had faith in me and believed that I could do things beyond what I could ever imagine. He pushed me against all the odds and transformed my thought process of how to approach a problem. He is in all true sense a mentor, facilitator, tutor, coach and guide.

Dr. A M Sherry, our program coordinator, who is always
there for the students.


Thank you for all your support!!!

Sumit Gupta

Page 2

GAAR – Impacts and Implications

General Anti-Avoidance Rule (GAAR) introduced by the Finance Act,2012 is applied to deny tax treaty benefits to non-residents taxpayers who would otherwise be entitled to them through improper use of treaty provisions. Under Indian GAAR, an arrangement whose main purpose or one of the main purposes is to obtain a tax benefit and which satisfies certain prescribed conditions such as lack of commercial substance, abuse of treaty provisions, etc would qualify as an impermissible avoidance arrangement on which GAAR could be applicable. The tax effect of such impermissible avoidance arrangements is to be determined by the Indian Revenue Authority (‘IRA’) in any manner it sees appropriate, which would include disregarding or combining or recharacterising any step / parties in the arrangement, ignoring the arrangement, re-allocating income and expenses, re-characterising equity as debt and vice versa, re-locating the place of residence of any party or suits of an asset, etc. Tax avoided is considered as tax evaded. GAAR can be made applicable in dealing with potential misuse of treaties and can override the provisions of a tax treaty in situations involving treaty shopping. Treaty shopping is subject to GAAR.

Sumit Gupta

Page 3

GAAR – Impacts and Implications

Snapshot of GAAR Provisions
Doctrine of ‘substance over form’ codified to deter tax avoidance. No carve out for genuine tax planning: • Trigger for GAAR - main purpose or one of the main purpose is to obtain ‘tax benefit’. Authority of Advance Rulings (‘AAR’) may be approached for determining applicability of GAAR. Onus to prove that transaction meant to obtain a tax benefit on the Indian Revenue Authorities (‘IRA’). GAAR panel to approve the application of GAAR . If GAAR invoked, Revenue empowered inter-alia to: • ‘disregard’ or ‘combine’ any step in the arrangement. • look through the arrangement by disregarding the corporate structure. • ‘re-allocate’ income/ expense, ‘re-characterize’ equity into debt or debt into equity. • treat the place of residence of any party or part of an asset or transaction other than place or location mentioned in the arrangement. Draft Guidelines issued by Chairman, Central Board of Direct Taxes (‘CBDT’) to give recommendations and suggest safeguards for proper implementation of GAAR. The Draft Guidelines give a sneak preview into the mindset of the IRA. The legality of the Draft Guidelines can be questioned as they propose to overrule the provisions of the domestic tax statute and the international tax treaties. Draft Guidelines contain explanation of GAAR provisions and illustrations for applicability of GAAR. Sumit Gupta Page 4

GAAR – Impacts and Implications

Impact on Foreign Institutional Investors (‘FII’)
It was felt that these provisions would give unbridled powers to tax officers, allowing them to question any tax saving deal. Foreign institutional investors in particular were worried that their investments routed through Mauritius could be denied tax benefits enjoyed by them under the Indo-Mauritius tax treaty. Net FIIs have been illustrating an...
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