Addressing investors' concerns ahead of GAAR implementation from April 1, the tax department on Friday said it will not interplay with their right to choose a method of transaction and won’t apply if routing of funds through a jurisdiction is “based on non-tax commercial considerations”.
The General Anti-Avoidance Rules (GAAR), which seek to prevent companies from routing transactions through other countries to avoid taxes, can be invoked through a two-stage process involving a nod at the level of principal commissioner of income tax and a panel headed by a high court judge.
Seeking to assuage concerns of investors, CBDT said GAAR provisions shall be effective from assessment year 2018-19 onwards and “shall not be invoked merely on the ground that the entity is located in a tax efficient jurisdiction”.
“If the jurisdiction of FPI is finalised based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, GAAR will not apply. GAAR will not interplay with the right of the taxpayer to select or choose method of implementing a transaction,” the CBDT said in a statement.
In a clarification on implementation of GAAR, CBDT said the provisions will not apply if the tax benefits obtained are permissible under the limitation of benefits clause provided in tax treaties.
Investments made by way of convertible instruments, bonus issuances or split/consolidation of holdings prior to April 1 will be grandfathered, it said.
CBDT said that adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies and they are required to be tackled through domestic anti-avoidance rules.
“However, if a case of avoidance is sufficiently addressed by Limitation of Benefits (LoB) provisions in the tax treaty, there shall not be an occasion to invoke GAAR,” it said.
The proposal to apply GAAR will be vetted first by the Principal Commissioner of I-T/Commissioner of I-T and at the second stage by an Approving Panel headed by a judge of High Court.
“The stakeholders have been assured that adequate procedural safeguards are in place to ensure that GAAR is invoked in a uniform, fair and rational manner,” CBDT said, adding that the government is committed to providing certainty and clarity in tax rules.