Gaar

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27 March 2012 Please explain GAAR agreement recent amended by budget in detail & its consequences

Ajay Mishra

Ajay Mishra (Expert)
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28 March 2012 Hi

INTRODUCTION OF GENERAL ANTI-AVOIDANCE RULE (GAAR)

• GAAR introduced primarily to codify the doctrine of substance over form and to deal with aggressive tax planning.
• GAAR provisions may override tax treaties to prevent treaty abuse and bring certain cross border transactions under taxation.
• An arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement with attendant tax consequences.
• Impermissible avoidance arrangement
––An arrangement would be declared as an impermissible avoidance arrangement if the main purpose or one of the purposes is to obtain a tax benefit and satisfies certain other conditions (lacks commercial substance, etc.)
• Lacking commercial substance - An arrangement will be deemed to lack commercial substance if:
––The substance of the arrangement is inconsistent with, or differs significantly from, the form of its individual steps or parts; or
––It involves round tripping financing or elements that have effect of offsetting each other or includes an accommodating party or a transaction which disguises the value, location, source, ownership or control of fund; or
––It involves a location of an asset / transaction / place of residence of any party which has been so located only for the purpose of obtaining tax benefits.
• Consequences of an impermissible avoidance arrangement
––Once the arrangement is held to be an impermissible avoidance agreement then the tax authorities may:
• disregard or ignore the arrangement or part thereof,
• recharacterise any step,
• disregarding any corporate structure,
• denial of benefits under tax treaty, etc.
• Framing of guidelines
––GAAR provisions to be applied in accordance with guidelines to be prescribed by Board.
• Onus
––The onus to prove that the main purpose of the arrangement is not to obtain the tax benefits would be on the taxpayer.
• Process
––The Assessing Officer would be required to make a reference to the Commissioner for invoking the anti-avoidance provisions who may refer the case to an Approving Panel, consisting of 3 members
––The Approving Panel would be required to either declare an arrangement to be impermissible or otherwise within a period of six months.
––Taxpayer to file appeal before the Income Tax Appellate Tribunal.

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