Chapter 19 General Anti Avoidance Rules ‘GAAR’ – CS Professional Advance Tax Law Notes is designed strictly as per the latest syllabus and exam pattern.
General Anti Avoidance Rules ‘GAAR’ – CS Professional Advance Tax Law Study Material
Question 1.
Discuss in brief some distinguishing features of General Anti-Avoidance Rules (GAAR) and Specific Anti-Avoidance Rules (SAAR). (Dec 2019, 3 marks)
Answer:
Distinguishing features of General Anti Avoidance Rules (GAAR):
- These involve necessarily granting the discretion to the tax authorities to invalidate the arrangements as impermissible tax avoidance.
- They have a far broader application and hence interpreted in a more extensive manner.
- GAAR has the potential to counter more effectively and outsmart the tax payers in their “out of box thinking” and their approach in devising new means of tax avoidance.
Distinguishing features of Specific Anti Avoidance Rules (SAAR)
- These are specific and help reduce to time and cost involved in tax litigation.
- These provide certainty to any taxpayer while formalising specific arrangements.
- These don’t provide any discretion to the tax authorities.
- There is always a possibility that the tax payer may find loopholes and circumvent the limited applications of specific provisions.
Question 2.
Discuss the exclusions provided from the provisions of GAAR. (Aug 2021, 3 marks)
Answer:
Rule 10U of the Income-tax Rules, 1962 ‘the Rules’ provides for certain exclusions from the provisions of GAAR, which are as follows:-
1. An arrangement where the tax benefit in the relevant assessment year arising, in aggregate, to all the parties to the arrangement does not exceed a sum of ₹ 3 crore;
2. A Foreign Institutional Investor, who is an assessee under the Income-tax Act, 1961, and has not taken benefit of an agreement referred to in section 90 or section 90A as the case may be; and has invested in listed securities, or unlisted securities, with the prior permission of the competent authority, in accordance with the Securities and Exchange Board of India (Foreign Institutional Investor) Regulations, 1995 and such other regulations as may be applicable, in relation to such investments;
3. A non-resident, in relation to investment made by him by way of offshore derivative instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor;
4. Any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of investments made before the [1st day of April, 2017] by such person.
Question 3.
Provisions of Chapter X-A of Income-tax Act, 1961 relating to General Anti Avoidance Rule (GAAR) made applicable from A.Y. 2019-20 in relation to the arrangement as specified therein. Explain all those cases/matters where the provisions of GAAR do not apply. (Dec 2021, 5 marks)
Answer:
The provision of General Anti Avoidance Rules ‘GAAR’ shall not apply in certain cases which are as follow:
(a) an arrangement where the tax benefit in the relevant assessment year arising, in aggregate, to all the parties to the arrangement does not exceed a sum of rupees three crores.
(b) a Foreign Institutional Investor:
i. who is an assessed under the Act.
ii. who has not taken benefit of an agreement referred to in section 90 or section 90A as the case may be; and
iii. who has invested in listed securities, or unlisted securities, with the prior permission of the competent authority, in accordance with the Securities and Exchange Board of India (Foreign Institutional Investor) Regulations, 1995 and other regulations as may be applicable, in relation to such investments;
(c) a person, being a non-resident, in relation to investment made by him by way of off shore derivative instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor.
(d) any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of investments made before the 1st day of April, 2017 by such person.
Question 4.
Explain briefly the provision of General Anti Avoidance Rule (‘GAAR’) in the following independent cases :
(a) General Anti Avoidance Rule (‘GAAR’) is regulated by section 95 of Income Tax Act, 1961 and do not over rule other sections of this Act.
(b) Where relief is available under double taxation avoidance agreement (DTAA), there will not be implication of GAAR.
(c) Impermissible avoidance agreement is the substance of GAAR. Mention in brief what are the constituents of impermissible avoidance agreement. (June 2022, 5 marks)
Answer:
(a) The statement is incorrect as section 95 of the Income Tax Act, 196T starts with a non-obstinate clause which over rules all other provision of the entire act and shall have operation notwithstanding anything contained in this Act.
(b) The statement is incorrect as even in cases where relief is available under double taxation avoidance agreement (DTAA), the tax payer will still be continued to be monitored by the provision of GAAR by virtue of section 90(2A) of the Income tax Act, 1961.
(c) Section 96 of the income tax Act, 1961 refer to and defines an “Impermissible Avoidance Arrangement” – An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and:
- It creates right, or obligation, which are not ordinarily created between person dealing at arm’s length
- It result, directly or indirectly, in the misuse, or abuse, of the provision of this Act
- Lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or part: or
- Is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purpose.
Question 5.
With reference to Income Tax Act, 1961, briefly discuss the difference between General Anti Avoidance Rules ‘GAAR’ and Specific Anti Avoidance Rules ‘SAAR’. (Dec 2022, 3 marks)
Question 6.
ABC Ltd. has 2 factories one of which is in SEZ, Company moves the produce of the non SEZ factory at a price considerably lower than the fair market value to the SEZ factory. This lowers the cost of production of the SEZ factory and the goods are sold from therein after insignificant value addition. Consequently, the SEZ factory shows higher profits and that entitles the assessee to claim a higher deduction from the computation of income.
Can General Anti Avoidance Rules ‘GAAR’ specified under the Income Tax Act, 1961 be invoked in this case? (June 2019, 3 marks)
Answer:
There is no misrepresentation of facts in the situation given in the question and hence there is no tax evasion. In the given case, ABC Ltd. has made to shift the profits from a taxable zone to a zone with tax benefits being SEZ and hence this would be dealt with by the transfer pricing regulation. Hence, GAAR will not be invoked in this case.
Question 7.
Write short note on GAAR v/s SAAR.
Answer:
GAAR [General Anti-Avoidance Rules]
- These involve necessarily granting the discretion to the tax authorities to invalidate the arrangements as impermissible tax avoidance.
- They have a far broader application and hence interpreted in a more extensive manner.
- GAAR has the potential to counter more effectively and outsmart the tax payers in their “out of the box thinking” and their approach in devising new means of tax avoidance.
SAAR [Specific Anti Avoidance Rules]
- These are specific and help reduce time and costs involved in tax litigation
- These provide certainty to any tax payer while formalising specific arrangements
- These don’t provide any discretion to the tax authorities
- There is always a possibility that the tax payers find loopholes and circumvent these limited application, specific provisions.
Question 8.
Write short note on Need of GAAR.
Answer:
Tax avoidance, like tax evasion, seriously undermines the achievements of the public finance objective of collecting revenues in an efficient, equitable, and effective manner. Sectors that provide a greater opportunity for tax avoidance tend to cause distortions in the allocation of resources. Since the better-off sections are more endowed to resort to such practices, tax avoidance also leads to cross-subsidization of the rich.
Therefore, there is a strong general presumption in the literature on tax policy that all tax avoidance, like tax evasion, is economically undesirable and inequitable. On considerations of economic efficiency and fiscal justice, a taxpayer should not be allowed to use legal constructions or transactions to violate horizontal equity.
In the past, the response to tax avoidance has been the introduction of legislative amendments to deal with specific instances of tax avoidance. Since the liberalization of the Indian economy, increasingly sophisticated forms of tax avoidance are being adopted by the taxpayers and their advisers. The problem has been further compounded by tax avoidance arrangements spanning across several tax jurisdictions. This has led to severe erosion of the tax base. Further, appellate authorities and courts have been placing a heavy onus on the Revenue when dealing with matters of tax avoidance even though the relevant facts are in the exclusive knowledge of the taxpayer and he chooses not to reveal them.
Question 9.
Write a short note on Tax Evasion V/S Tax Avoidance”.
Answer:
It is important to highlight the distinction between Tax Evasion and Tax Avoidance. The Organisation for Economic Cooperation and Development (OECD) has defined tax evasion as “A term that is difficult to define but which is generally used to mean illegal arrangements where liability to tax is hidden or ignored i.e. the tax payer pays less tax than he is legally obligated to pay by hiding income or information from tax authorities”. In case of tax. evasion deliberate steps are taken by the tax payer in order to reduce the tax liability by illegal or fraudulent means.
Tax avoidance, on the other hand is defined by the OECD as “term used to describe an arrangement of a tax payer’s affairs that is intended to reduce his liability and that although the arrangement could be strictly legal it is usually in contradiction with the intent of the law it purports to follow”. The key distinction being that in tax avoidance the key facts or details are not hidden by the tax payer but are on record.
In Australia, the Ralph Review of Business Taxation has characterized tax avoidance as misuse or abuse of the law that is often driven by structural loopholes in the law to achieve tax outcomes that were not intended by Parliament but also includes the manipulation of law and focus on form and legal effect rather than the substance.
Another term which is sometimes used while analysing tax evasion and tax avoidance is tax planning. The OECD defines tax planning as “arrangement of a person’s business and /or private affairs in order to minimise tax liability”. It may be noted that, in practice in some cases, the dividing line between tax planning and tax avoidance, or between permissible tax avoidance and impermissible tax avoidance, may not be clear.
It may be noted that the GAAR is not an antidote for ‘tax evasion’, but for ‘tax avoidance’. The GAAR cannot deal with tax evasion since it cannot deal with what is not reported. The Government has recognised that the GAAR is meant for tackling tax avoidance.
Question 10.
A choice is being made by a company between leasing an asset and purchasing the same asset. The company would claim a deduction for leasing rentals rather than depreciation if it had their own asset. Would the lease rent payment be disallowed as an expense under GAAR?
Answer:
GAAR provisions, would not, prima facie, apply to a decision of leasing (as against purchase of an asset). However, if it is a case of circular leasing, i.e. the taxpayer leases out an asset and through various sub-leases, takes it back on lease, thus creating a tax benefit without any change in economic substance, Revenue would examine the matter for invoking GAAR provisions.
Question 11.
Will GAAR provisions apply where the jurisdiction of the FPI is finalised based on non-tax commercial considerations and such FPI has issued P-notes referencing Indian securities? Further, will GAAR be invoked with a view to denying treaty eligibility to a Special Purpose Vehicle (SPV), either on the ground that it is located in a tax friendly jurisdiction or on the ground that it does not have its own premises or skilled professional on its own roll as employees.
Answer:
For GAAR application, the issue, as may be arising regarding the choice of entity, location etc., has to be resolved on the basis of the main purpose and other conditions provided under section 96 of the Act. GAAR shall not be invoked merely on the ground that the entity is located in a tax efficient jurisdiction. If the jurisdiction of FPI is finalized based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, GAAR will not apply.
Question 12.
Will GAAR be invoked if SAAR applies?
Answer:
It is internationally accepted that specific anti avoidance provisions may not address all situations of abuse and there is need for general anti-abuse provisions in the domestic legislation. The provisions of GAAR and SAAR can coexist and are applicable, as may be necessary, in the facts and’ circumstances of the case.
Question 13.
DEF Ltd. has 2 factories and moves the produce of the non SEZ factory at a price considerably lower than the fair market value, to the SEZ Factory. This lowers the cost of production of the SEZ Factory and the goods are sold from therein after insignificant value addition. Consequently, the SEZ Factory shows higher profits and that entitles the assessee to claim a higher deduction from the computation of Income. Can GAAR be invoked?
Answer:
There is no misrepresentation of facts in this situation and hence there is no tax evasion. In this case the company has tried to shift the profits from a taxable zone to a zone with tax benefits and hence would be dealt with by the transfer pricing regulations. Hence, GAAR will not be invoked in this case.
Question 14.
M/s XYZ Ltd. has 2 factories, one which produces certain goods in a non SEZ area and one in a SEZ area. It diverts produce from the non SEZ factory and shows the same as being manufactured in the SEZ factory, whilst it is only packaging the goods therein. Would GAAR apply in this case?
Answer:
This is a clear case of misrepresentation of facts by showing production of non SEZ units as within the SEZ unit, and hence falls in the bracket of tax evasion and not tax avoidance. Hence, GAAR would not be invoked in this case as GAAR intends to tackle only tax avoidance and not tax evasion.
Question 15.
M/s ABC Ltd. is an Indian Company. It sets up a unit in a SEZ in FY 2018-19 for manufacturing of cement. It claims 100% deduction of profits, earned from that unit in FY 2021 -22 and subsequent years per Sec 10AA of the Act. Would GAAR be invoked in that case?
Answer:
There is an arrangement of setting up a unit in a SEZ which results in tax benefits. However, this is clearly a case of tax mitigation wherein the assessee is taking advantage of a benefit offered to him vide adherence to the conditions so imposed, and the consequences that emanate from it, that is setting up a business in an SEZ area. Hence, the Revenue would not ideally invoke GAAR in this situation.
General Anti Avoidance Rules ‘GAAR’ Notes
SAAR [Specific Anti Avoidance Ruies]
- These are specific and help reduce time and costs involved in tax litigation
- These provide certainty to any tax payer while formalising specific arrangements
- These don’t provide any discretion to the tax authorities
- There is always a possibility that the tax payers find loopholes and circumvent these limited application, specific provisions
GAAR [General Anti-Avoidance Rules]
- These involve necessarily granting the discretion to the tax authorities to invalidate the arrangements as impermissible tax avoidance.
- They have a far broader application and hence interpreted in a more extensive manner.
- GAAR has the potential to counter more effectively and outsmart the tax payers in their“out of the box thinking” and their approach in devising new means of tax avoidance.
“Impermissible Avoidance Arrangement”
An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it –
- creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;
- results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;
- lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or
- is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.
Round trip financing
Section 97(2) of the Act defines round trip financing to include any arrangement in which, through a series of transactions, funds are transferred among the parties to the arrangement and such transactions do not have any substantial commercial purpose other than obtaining the tax benefit.
An accommodating party
Section 97(3) of the Act defines an accommodating party to be a party which is included in an arrangement mainly for obtaining tax benefit to the taxpayer. Such party may or may not be a connected party to the taxpayer.