28 Jan 2017 15:23 IST

CBDT softens the GAAR blow on foreign investors

But its sword still hangs over foreign portfolio investors; anti-tax avoidance rule here to stay

Come April 1, foreign investors need not fret too much about GAAR — an anti-tax avoidance provision in the armoury of the Indian tax authorities.

The Central Board of Direct Taxes has softened the GAAR blow on private equity funds and foreign portfolio investors (FPIs). In a circular that answers as many as 16 questions on General Anti-Avoidance Rules (GAAR), the CBDT has clarified that GAAR will not be invoked if the jurisdiction of the FPI is “finalised based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit”.

What is GAAR

GAAR is an anti-tax avoidance rule that empowers revenue authorities in a country to deny the tax benefits of transactions/arrangements, which do not have any commercial substance or consideration other than achieving the tax benefit.

The CBDT clarified that GAAR will not interplay with the right of the taxpayer to choose the method of implementing a transaction. Further, grandfathering as per IT Rules will be available to compulsorily convertible instruments, bonus issuances or split/consolidation of holdings in respect of investments made prior to April 1 in the hands of same investor.

It clarified that the adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies, but will be tackled through domestic anti-avoidance rules.

However, if a case of avoidance is sufficiently addressed by limitation of benefits provisions in the tax treaty, GAAR will not be invoked.

Further, if at the time of sanctioning an arrangement, the Court has explicitly and adequately considered the tax implications, GAAR will not apply to such an arrangement. It has also been clarified that GAAR will not apply if an arrangement is held as permissible by the Authority for Advance Rulings.

Further clarifications, if any, on doubts of stakeholders regarding GAAR implementation, will also be provided, an official release said.

“The GAAR blow has been softened to an extent since the circular clarifies that GAAR will not be invoked merely on the ground that an entity is located in a tax-efficient jurisdiction,” said Vinita Krishnan, Associate Director (Direct Taxes), Khaitan & Co, a law firm, but cautioned that the GAAR sword has not been fully avoided.

Relief to pooling vehicles

Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co, said: “The clarification gives relief to pooling vehicles incorporated outside India so long as they can substantiate choice of jurisdiction is not based upon tax considerations.”

However, Rahul Mitra, Partner, National Head Transfer Pricing & BEPS, KPMG India, felt that more detailed guidelines, with illustrations, for a topic as important and critical as GAAR would have been better, but the CBDT has done well to clarify on some key points.