Overview of draft GAAR guidelinesThe basic criticism of a statutory General Anti Avoidance Rule (GAAR) which is raised worldwide is that itprovides a wide discretion and authority to the tax administration which can cast an excessive tax andcompliance burden on the taxpayer without commensurate remedies. Hence, the Chairman, CBDT hasconstituted a Committee under the Chairmanship of the Director General of the Income Tax(International Taxation) to give recommendations for formulating the guidelines for properimplementation of GAAR Provisions under the Direct Tax Code Bill, 2010 and to suggest safeguards tothese provisions to curb the abuse thereof.

These draft guidelines regarding implementation of GAAR provides explanation and clarity regardinginvoking GAAR provisions in following manner:

1. Substance over form rule

GAAR is a codification of the proposition that while interpreting the tax legislation, substance shouldbe preferred over the legal form. Transactions have to be real and are not to be looked at inisolation. The fact that they are legal does not mean that they are acceptable with reference to themeaning in the fiscal statute. Where there is no business purpose, except to obtain a tax benefit, theGAAR provisions would not allow such a tax benefit to be availed through the tax statute. The GAARprovisions codify this ‘substance’ over ‘form’ rule.

2. Onus on revenue to prove

The onus of proving that there is an “impermissible avoidance arrangement” will be on the Revenue.The revenue has to prove for “impermissible avoidance arrangement” in following manner:

First Step:

There is an 'arrangement' (onus: Revenue)

There is a 'tax benefit'(onus: Revenue)

The main purpose or one of the main purposes of thearrangement is to obtain a tax benefit (Onus:Revenue)

Arrangement has characteristics of: 1) Not at arm'slength 2) Misuse/ abuse of tax provisions 3) Lackscommercial substance 4) Not ordinarily employed forbona fide purposes

First condition

Second condition

Third condition

Fourth condition

Overview of draft GAAR guidelinesThe basic criticism of a statutory General Anti Avoidance Rule (GAAR) which is raised worldwide is that itprovides a wide discretion and authority to the tax administration which can cast an excessive tax andcompliance burden on the taxpayer without commensurate remedies. Hence, the Chairman, CBDT hasconstituted a Committee under the Chairmanship of the Director General of the Income Tax(International Taxation) to give recommendations for formulating the guidelines for properimplementation of GAAR Provisions under the Direct Tax Code Bill, 2010 and to suggest safeguards tothese provisions to curb the abuse thereof.

These draft guidelines regarding implementation of GAAR provides explanation and clarity regardinginvoking GAAR provisions in following manner:

1. Substance over form rule

GAAR is a codification of the proposition that while interpreting the tax legislation, substance shouldbe preferred over the legal form. Transactions have to be real and are not to be looked at inisolation. The fact that they are legal does not mean that they are acceptable with reference to themeaning in the fiscal statute. Where there is no business purpose, except to obtain a tax benefit, theGAAR provisions would not allow such a tax benefit to be availed through the tax statute. The GAARprovisions codify this ‘substance’ over ‘form’ rule.

2. Onus on revenue to prove

The onus of proving that there is an “impermissible avoidance arrangement” will be on the Revenue.The revenue has to prove for “impermissible avoidance arrangement” in following manner:

First Step:

There is an 'arrangement' (onus: Revenue)

The main purpose or one of the main purposes of thearrangement is to obtain a tax benefit (Onus:Revenue)

Arrangement has characteristics of: 1) Not at arm'slength 2) Misuse/ abuse of tax provisions 3) Lackscommercial substance 4) Not ordinarily employed forbona fide purposes

First condition

Second condition

Third condition

Fourth condition

Overview of draft GAAR guidelinesThe basic criticism of a statutory General Anti Avoidance Rule (GAAR) which is raised worldwide is that itprovides a wide discretion and authority to the tax administration which can cast an excessive tax andcompliance burden on the taxpayer without commensurate remedies. Hence, the Chairman, CBDT hasconstituted a Committee under the Chairmanship of the Director General of the Income Tax(International Taxation) to give recommendations for formulating the guidelines for properimplementation of GAAR Provisions under the Direct Tax Code Bill, 2010 and to suggest safeguards tothese provisions to curb the abuse thereof.

These draft guidelines regarding implementation of GAAR provides explanation and clarity regardinginvoking GAAR provisions in following manner:

1. Substance over form rule

GAAR is a codification of the proposition that while interpreting the tax legislation, substance shouldbe preferred over the legal form. Transactions have to be real and are not to be looked at inisolation. The fact that they are legal does not mean that they are acceptable with reference to themeaning in the fiscal statute. Where there is no business purpose, except to obtain a tax benefit, theGAAR provisions would not allow such a tax benefit to be availed through the tax statute. The GAARprovisions codify this ‘substance’ over ‘form’ rule.

2. Onus on revenue to prove

The onus of proving that there is an “impermissible avoidance arrangement” will be on the Revenue.The revenue has to prove for “impermissible avoidance arrangement” in following manner:

First Step:

First condition

Second condition

Third condition

Fourth condition

Second step:

3. Monetary threshold

There will be monetary threshold for invoking the GAAR provisions and to provide relief to smalltaxpayers.

4. Prescription of statutory forms:

Forms are introduced for procedures for invoking the GAAR provisions:

For the Assessing Officer to make a reference to the Commissioner For the Commissioner to make a reference to the Approving Panel For the Commissioner to return the reference to the Assessing Officer

5. Prescribed time limits: CIT can make a reference to approving panel within 60 days of the receipt of the objection from

assessee. In case of the CIT accepting the assessee’s objection and being satisfied that provision of GAAR

are not applicable, the CIT will communicate his decision to the AO within 60 days of the receiptof the assessee’s objection.

Disregarding/ Combining/ recharacterising whole/part of theimpermissible arrangement

Treating the impermissible arrangement as if it had notbeen carried out

Disregarding any accommodating party or treating them and any other party as oneand the same

Treating connected parties as one and the same person

Reallocating accruals, expenses etc.

Treating place of residence, situs of assets or of transaction different from thatprovided in the arrangement

Looking through an arrangement by disregarding corporate structure

If prove to be impermissible Avoidance Arrangement then Consequencesmay be determined by

Commissioner cannot take after the period of six months from the end of the month in whichthe reference under sub-section 144BA(1) was received by the Commissioner.

6. Setting up approval penal:

To begin with provisions, approving panel will be situated at Delhi and it will comprise of threemembers – 2 CCIT and 1 officer of the level of joint secretary or above from the ministry of law.Subsequently, the CBDT would review the number of Approving Panels required on the basis of theworkload in the FY 2014-15.

7. Special provisions for FII’s

If FII chooses not to take any benefit under an agreement entered into by India under section 90 or90A of the Act and subjects itself to tax in accordance with the domestic law provisions, then, theprovisions of GAAR would not apply to such FII. Further, Safe harbor rules could be provided to FII’ssubject to the payment of taxes as per domestic law.

8. Definition of ‘connected person’ for applicability of GAAR:

“Connected person” for invoking GAAR would include:

definition of “associated enterprise” given in section 92A, definition of ‘relative’ in section 56 and “persons” covered u/s 40A(2)(b).

9. Applicability

The provisions of GAAR will apply to the income accruing or arising to the taxpayers on or after01.04.2013.

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