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General Anti Avoidance Rules A paradigm shift in busineses
General Anti Avoidance Rule (GAAR):
Declaration of impermissible avoidance arrangement

CBDT on 27th Jan 2017 has issued clarification via Circular No 7 of 2017 that 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.

GAAR stands for General Anti Avoidance Rules. It was first introduced by Pranab Mukherjee as finance minister in the budget of 2012. General Anti
Avoidance Rules (GAAR) caused immense insecurity among foreign investors in India, leading the government to defer its implementation till April
2015. When it was finance minister Arun Jaitleys turn to decide on the fate of GAAR in 2015, he further deferred it to April 2017 to give industry as
well as the tax department more time to adjust to this sophisticated tax regime.

GAAR provisions are contained in chapter XA of the Income Tax Act, 1961 section 95 to Section 102. It empowers officials to deny the tax benefits
on transactions or arrangements which do not have any commercial substance or consideration other than achieving tax benefit. It contains a provision
allowing the government to retroactively tax overseas deals involving local assets.

GAAR contains provisions to stop misuse of treaties that India has with other countries for tax avoidance. These are rules targeted at businesses that
are structured solely for avoiding tax in India, such as routing investment into the country through tax havens. Transactions that fail the GAAR test will
be subject to tax.

As per GAAR provisions an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the
consequence in relation to tax arising therefrom may be determined. An impermissible avoidance arrangement means an arrangement, the main purpose
of which is to obtain a tax benefit, and it creates rights, or obligations, which are not ordinarily created between persons dealing at arms length or
results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act or lacks commercial substance or is deemed to lack commercial
substance under section 97 of the Income Tax Act, 1961, in whole or in part; or is entered into, or carried out, by means, or in a manner, which are not
ordinarily employed for bona fide purposes.

If an arrangement is declared to be an impermissible avoidance arrangement, then, the consequences, in relation to tax, of the arrangement, including
denial of tax benefit or a benefit under a tax treaty, shall be determined, in such manner as is deemed appropriate, in the circumstances of the case,
including by way of but not limited to the following, namely:
(a) disregarding, combining or recharacterizing any step in, or a part or whole of, the impermissible avoidance arrangement;
(b) treating the impermissible avoidance arrangement as if it had not been entered into or carried out;
(c) disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;
(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;
(e) reallocating amongst the parties to the arrangement
 (i) any accrual, or receipt, of a capital nature or revenue nature; or
(ii) any expenditure, deduction, relief or rebate;
(f) treating
(i) the place of residence of any party to the arrangement; or
(ii) the situs of an asset or of a transaction,
at a place other than the place of residence, location of the asset or location of the transaction as provided under the arrangement; or
(g) considering or looking through any arrangement by disregarding any corporate structure.

Concluding note.
Government is committed to provide certainty and clarity in tax rules. GAAR is here to discipline the multinational companies against rigorous tax
planning without commercial substance.

The introduction of GAAR does not bring halt to the tax planning or any thinking regarding savings in taxes. However, it certainly calls for a paradigm
shift in thinking and in mindset, about what would now be acceptable as tax planning and more importantly as to how that would be demonstrated.
Documentation should come as life saver -meticulous maintenance of clear and consistent documentation demonstrating the business purpose and
intent will acquire critical significance as never before.

Robust tax governance procedures should be in place to keep enterprise from being unnecessarily exposed to the application of provisions
of GAAR.