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GAAR Rules: So Close; Yet So Far!

Published on Mon, Sep 30,2013 | 18:45, Updated at Mon, Sep 30 at 18:45Source : 

By: Girish Vanvari, Co-Head-Tax & Ravi Shingari, Director-Tax & Regulatory, KPMG
The Government of India recently notified the applicable rules in relation to the hugely debated General Anti-Avoidance Rules ("GAAR") provisions, with a primary objective of restoring investor confidence and allaying ambiguity in the mind of the taxpayers.

The GAAR provisions, introduced in Budget 2012-13 by Pranab Mukherjee were initially proposed to come into effect from April 1, 2014. However, in January this year, the implementation date of GAAR was extended to 1st April, 2016, in wake of Shome Committee's recommendations and widespread negative investor sentiments.

Under these newly introduced rules, recommendations from Shome Committee seem to have been selectively picked up.  The clarity to be brought in by the rules, which Shome Committee had intended in its report, is not visible. Having said that, by placing a monetary threshold of INR 30 million, the rules have clearly provided the much expected and awaited respite to small tax payers.  An aspect, which was acknowledged by the finance minister in his statement on 14 January 2013 but was found missing in the fine print when the GAAR provisions were introduced vide the Finance Bill 2013. 

The Rules also indicate excluding Foreign Institutional Investors ("FII") from the purview of GAAR subject to certain specified conditions. One of the conditions, as recommended by the Shome Committee, states that the FIIs should not have availed the tax treaty benefit to be not covered by GAAR.  This clearly casts a shadow of doubt on all the transactions being undertaken by FIIs based out of Mauritius and Singapore as it appears that they would be covered by GAAR.  This may dampen the investment mood and climate. 

All non residents having investment (directly or indirectly) in the form of offshore derivative instruments or otherwise in a FII have also been excluded from the applicability of GAAR. 

The most discussed incentive offered in these rules relate to exclusion of income earned from transfer of investments made before 30th August, 2010. While there is some confusion related to the interpretation of this provision as it does not seem to be clearly worded, it appears that the Government's intent at this stage is to grandfather all investments made before 30th August, 2010.

Further, the rules also specify that without prejudice to the said grandfathering incentive, any tax benefit obtained from an arrangement on or after 1st April 2015 shall be subject to GAAR provisions. A combined reading of the two provisions effectively implies that GAAR shall not apply to the following:

(a) Income from transfer of investments made before 30th August 2010; and

(b) Tax benefits obtained up to 31st March 2015 from any arrangement

As one would recall, the Shome Committee, set-up to study the GAAR provisions and provide recommendations, had in its report stated that "All investments (though not arrangements) made by a resident or non-resident which are existing as on the date of commencement of GAAR should be grandfathered so that on exit (sale of such investments), GAAR provisions are not invoked and tax benefit is not denied."

Other relevant provisions:

The newly introduced rules also provide relief by mentioning that "where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax shall be determined with reference to such part only".

Additionally, in line with the statement issued by the Finance Minister on 14 January 2013 to cast an obligation on the Assessing officer to undertake thorough exercise before invoking the GAAR proceedings, tax officials would have to "issue a notice in writing" to the Assessee seeking objections, if any, to its applicability.
Under these new rules, it is now essential for the Assessing officer to provide objective detailed information about the arrangement to which he believes GAAR provisions apply. Such information, inter-alia, includes description of the tax benefit arising under the arrangement, the basis and reason for considering that the main purpose of the identified arrangement is to obtain tax benefit, the basis and reasons why the arrangement satisfies the condition to consider such arrangement as an impermissible avoidance arrangement etc. This puts a good check on the powers bestowed by these rules to the Assessing officers.

The rules also specify well defined timelines for the Revenue Authorities for conclusion of proceedings, a provision very useful in the Indian context.


The newly introduced rules provide for monetary threshold for the benefit of the common man, non-applicability to FIIs (subject to conditions) and grandfathering of investments among other well defined procedural conditions makes an attempt to present a fair anti-avoidance regime.

However, a host of critical recommendations from the Shome Committee report have still not been incorporated in these rules. 

Probably a little more clarity and incorporation of the key recommendations from the Shome Committee report, in the rules is what would help to rebuild investor/ tax payer confidence and scrub the somewhat tarnished image of GAAR as a draconian regime.

Needless to state, it is absolutely critical to implement these rules in true spirit to help allay the investors' fear about the uncertainty with regards to the execution of the GAAR provisions.

(Disclaimer: The views and opinions herein are those of the authors and do not necessarily represent the views and opinions of KPMG in India. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.)


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