JANUARY 2017

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KEY TAKEAWAYS FROM GAAR CLARIFICATIONS

An important clarification in relation the administration of the General Anti-avoidance

Rules (GAAR) provisions is released today, on Jan 27, 2017. The clarifications are issued
in relation to the queries received by the Central Board of Direct Taxes (tax
administration authority in India). The clarification deals with 16 questions, which is a
culmination of different apprehensions of the tax payers at large. This Alert is prepared
with a view to provide a perspective on some of the important aspects of the
clarification.
 Question 1: GAAR and Specific Anti-avoidance Rules (SAAR) can co-exist. As a
result, subjectivity in administration of GAAR provisions cannot be ruled out.
 Question 2: If a case of avoidance is sufficiently addressed by the Limitation of
Benefits (LoB) Clause in the tax treaty, GAAR will not be invoked. It needs to be
seen as to what is the meaning of “case of avoidance is sufficiently addressed”?
Does this leave room for interpretation of LoB clause, subject to GAAR?
 Question 4: If the jurisdiction of FPI is based on non-tax commercial
considerations and main purpose of arrangement is not to obtain tax benefit,
GAAR will not apply. The test of ‘non-tax commercial consideration’ is at best,
frogs in boiling water. Absence of objective condition will impact the ability of
foreign investors to have predictable tax administration.
 Question 5: Grandfathering will be available to investments made before April 1,
2017 in respect of convertible instruments as also shares issued consequent to
split, consolidation of holdings or bonus issue of grandfathered shareholding. This
is a welcome announcement as instruments which are compulsorily convertible,
are protected. However, there are two important conditions, viz, the conversion
is at terms finalized at the time of issue of such instruments and only the income
from the transfer of the original instrument and converted instrument is
protected. The question remains as to whether shares received on amalgamation
or demerger, will also be protected as received on consolidation? This also raises
hope that clarification in relation to amended treaties of Mauritius, Singapore
may also be on the similar lines as that of GAAR clarification.
Chart 1 – Monthly Returns to be filed by Normal Assessee
 Question 7, 8 and 15: GAAR will not apply if the arrangement is held as permissible by Authority for Advance Ruling.
Similarly, if Commissioner/Approving Panel has held arrangement as permissible in one year, then following
principle of consistency and facts and circumstances remaining the same, GAAR will not be invoked for that
arrangement in subsequent year. However, the fact that GAAR may apply if the Court or National Company Law
Tribunal (NCLT) has not explicitly and adequately considered the tax implications is a cause of concern as Court or
NCLT generally focuses on creditors interest while sanctioning an arrangement.
 Question 13 and 14: Computation of the tax benefit is based on taxation of entire arrangement and in relation to
each year. This would, in effect, permit the contradictory entries to be set off leading to net tax effect, even
though there is no corresponding adjustment in the hands of other tax payer.

Release of two important clarifications, one on guiding principles for determination of place of effective management
(PoEM) and another on GAAR, a few days before announcement of the Budget proposals raises the expectation that the
eagerly awaited clarification on the amended tax treaty with Mauritius and others, may also be issued to put to rest any
anxiety on implementation of tax policies from April, 2017.
 If you require any further information about the material contained in the update, please get in touch with:

CONTACT US

Milind Kothari Jiger Saiya Pranay Bhatia

Managing Partner Partner Partner
Head - Direct Tax Direct Tax Direct Tax
milindkothari@bdo.in jigersaiya@bdo.in pranaybhatia@bdo.in
Tel: 022 3332 1601 Tel: 022 3332 1605 Tel: 022 3332 1682

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