Why SMEs need not fret over GAAR

Khyati Dharamsi

With the finance minister spelling out the applicability of GAAR, experts say the proposed new law may not impact SMEs

There has been much heat and dust over the proposed of General Anti-Avoidance Rules (GAAR), and many small and medium enterprises (SMEs) have been doing the rounds of their tax consultants to figure out the implications. Will your tax arrangements attract GAAR? Are there any changes you will have to make in your tax planning due to the proposed new tax law?

Too small to attract GAAR

Well, you can soothe those frayed nerves and concentrate on your business once again because it is highly unlikely that SMEs will attract the provisions of GAAR. According to a recent press note issued by the Finance Minister, “A monetary threshold of Rs 3 crore tax benefit in the arrangement will be provided in order to attract the provisions of GAAR.”

Stripped of jargon, this means any transaction involving a tax benefit of Rs 3 crore or more will fall under the purview of the law. “The actual value of the transaction or arrangement would have to be Rs 10 crore and it is unlikely that SMEs would be involved in deals of such high value,” explains K R Sekar, Partner at Deloitte Haskins & Sells. “Thus, SMEs would not be impacted in a big way.”

Transaction Value

While accepting the recommendations of the Shome Committee, the Finance Minister has made some modifications. While the committee had recommended a threshold limit of Rs 3 crore on an annual basis, the press note issued by the Finance Minister clarifies that the limit would apply, not annually, but to individual arrangements or transactions, points out Sandeep Ladda, Executive Director, PricewaterhouseCoopers India.

“So, if you have three different transactions in the entire financial year whose tax benefit collectively exceeds Rs 3 crore, then GAAR would not be applicable. You should worry only if each individual transaction has a tax benefit above Rs 3 crore.”

Typically, SMEs have tax benefits that are much less, Ladda observes. “The GAAR rules are good news for SMEs and start-ups, who don’t have to deal with high taxes,” he adds.

What if the company is planning to take over another firm? Will the scale then attract the GAAR provisions? “Even if an SME looks at a merger or acquisition, it would be rare for each transaction to exceed Rs 3 crore in tax benefits,” says Ladda.

What if a deal exceeds Rs 3 crore?

Before issuing a GAAR notice, there are other circumstances tax officials must consider. In his press note, the Finance Minister states that GAAR will apply only to arrangements whose ‘main purpose’ is tax benefit and not ‘one of the main purposes’. In other words, only arrangements that are completely devoid of commercial substance will attract the provisions of GAAR. So, if you have not tried to reduce your tax liability by misusing tax loopholes, you need not fear GAAR.

“We shouldn’t be sending out the wrong signal, that just because a company has foreign investors, they would be impacted by GAAR. If the tax benefit of more than Rs 3 crore is incidental to an agreement, the deal need not fall under GAAR. But if the deal is specifically structured to avoid tax, then GAAR would come into play,” explains Sekar.

What About Sister Concerns?

Another positive is that if a bigger company has been transferring assets or profits to a small enterprise, the ambiguity of the tax assessment, which was earlier left to the discretion of income tax officers, would be eliminated. Sunil Talati, former president of the Institute of Chartered Accountants in India, elaborates, “In India, when companies adjust accounts in such a manner that taxation would be impacted due to transfer to parties at arms length, the income tax officer was the only authority who would arbitrarily disallow such a transaction if found to be unreasonable.

The complaints raised wouldn’t serve much purpose, points out Talati. “It was arbitrarily used in favour of the department and would ultimately become a matter of litigation, even if it was not a way to convert a profit-making transaction into a loss-making transaction. Now GAAR will take care of the situation, from purchase, incurring of expenditure, service, labour, royalty payments etc. The basic idea of GAAR is that the legitimate tax due from the entity must be received and entities at arms’ length should not be allowed to take that profit by transfer,” observes Talati. Thus GAAR means fewer lawsuits when it comes to arms-length transactions.

Contesting IT Claims

In spite of your transactions not falling under GAAR, if the assessing officer raises a query under the proposed new law, you would be given a chance to contest the claim. The press note issued by the Finance Minister states, “The taxpayer would have an opportunity to prove that the arrangement is not an Impermissible Avoidance Agreement.”

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