Clarification for implementation of GAAR

The Income tax Act (ITA) contains anti-avoidance provisions in the form of General Anti-Avoidance Rules (GAAR) which provides wide powers to Tax Authority to deal with impermissible tax avoidance arrangements. The GAAR provisions under the ITA are effective from tax year 2017-18

Pursuant to Industry associations requesting for clarification on implementation of GAAR provisions, CBDT has issued a Circular providing 16 clarifications in Q&A format and a Press Release of even date summarizing the clarifications.

Some of the key clarifications of the Circular are: (a) GAAR can co-exist with Specific Anti-Avoidance Rules (SAAR); GAAR provisions can also apply if the Limitation-of- Benefits (LOB) test in a double taxation avoidance agreement (DTAA) does not adequately address tax avoidance; (b) consistency principle will be followed while applying GAAR provisions in different years if the facts and circumstances remain the same, (c) GAAR cannot apply if Authority for Advance Rulings (AAR) has, in an advance ruling, considered an arrangement to be permissible or if an authority such as the Court or National Company Law Tribunal (NCLT) has examined the tax avoidance matters adequately while sanctioning an arrangement (d) no corresponding adjustment across all taxpayers in an arrangement to be allowed as same militates against the deterrence of GAAR. The Circular also notes that adequate procedural safeguards are in place before GAAR can be invoked (such as, vetting by an Approving Panel) so that GAAR provisions are applied only in deserving cases. Other clarifications in the Circular deal with the scope of grandfathering to convertible securities, bonus issues etc.

The Press Release also provides that the Government is committed to provide certainty and clarity in tax rules and that further clarifications, if any, on the doubts of stakeholders regarding GAAR implementation, will be provided in due course.