Tax mitigation will not trigger GAAR: Govt

The government today said it planned to introduce safeguards in the proposed General Anti Avoidance Rules (GAAR) to address the industry’s concerns over misuse of the tax law provisions.

To start with, the revised draft of the Direct Taxes Code said that every arrangement for tax mitigation would not be liable to be classified as impermissible avoidance arrangement. GAAR will be put to use only if an entity, apart from obtaining tax benefit, undertakes a transaction which is not at arm’s length. Alternatively, if the tax authorities find that there has been a misuse or abuse of the provisions of DTC, or a transaction lacks commercial substance, the tax officials can use GAAR. The fourth condition in which the provisions will come into effect is if a deal is done in a manner which is not normally employed for bona fide business purposes.

And, to provide further comfort, the revised draft has said that the Central Board of Direct Taxes (CBDT) will issue guidelines to provide for the circumstances under which GAAR may be invoked. Also, the provisions will be invoked only if the deal is above a prescribed threshold.

PricewaterhouseCoopers’ Joint Tax Leader Shyamal Mukherjee suggested that the threshold would be a key thing to look at. “We had suggested that specific anti-abuse provisions be put in place. But even what the government has suggested provides comfort. It recognises that some of the issues related to the original proposal needed to be addressed and they have been done,” said Dinesh Kanabar, deputy chief executive officer and chairman (tax), KPMG India.

The first draft of DTC had left it to income-tax commissioners to decide if GAAR would be used or not.

The third safeguard proposed in the revised draft is the availability of the forum on the Dispute Resolution Panel (DRP) in cases where GAAR provisions are invoked. This is akin to the existing system available for international taxation matters, transfer pricing issues and certain domestic tax matters, where a panel of three commissioners hears the case after a draft order has been issues but a final order is awaited.

“This will help companies avoid going to commissioner (appeals) and go straight to the Tax Tribunal. But so far in most cases, DRP upholds the order of the tax official. So, it does not provide much comfort,” said a tax consultant.

Another tax advisor said that while safeguards were welcome, the actual use of the GAAR provision would depend on the person at the ground level who uses the provisions.

“Let’s see what is there in the provisions and how soon the rules are issued,” said a consultant at a international tax advisory firm.