Clarity on GAAR to rekindle investor confidence: India Inc

Addressing investors' concerns ahead of GAAR implementation from April 1, CBDT today 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".

GAAR, which seeks 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.

Issuance of clarifications on implementation of GAAR provisions is a move towards governments commitment to provide certainty and clarity in the tax rules, CII Director General Chandrajit Banerjee said.

"The clarification that GAAR will not interplay with the right of the taxpayer to choose method of implementing a transaction and adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies, as the same are required to be tackled through domestic anti- avoidance rules will go a long way to rekindle confidence and send a positive signal to the global investors," he said.

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...," the CBDT said in a statement.

The tax department 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.