Clarification Regarding Draft GAAR Guidelines

Posted on    29 June 2012

Draft guidelines regarding implementation of General Anti Avoidance Rules (GAAR) in terms of section 101 of the Income Tax Act, 1961




The Chairman, CBDT, Vide OM F.NO. 500/111/2009-FTD-1 Dated 27 February, 2012  constituted a Committee under the Chairmanship of the Director General of the Income Tax (International Taxation) to give recommendations for formulating the guidelines for proper implementation of GAAR Provisions under the Direct Tax Code Bill, 2010 and to suggest  safeguards  to these provisions to curb the abuse thereof. The Committee comprised of the following officers :-


1.    Director General of Income Tax (International Taxation)- Chairperson

2.     Joint Secretary (FT& TR-I)

3.    Joint Secretary (FT& TR-II)

4.    Joint Secretary (TPL-I)

5.    Director of International Taxation, Ahmedabad

6.    Director, FT & TR-III

7.    Addl. Director on Income Tax, Range-I (IT), New Delhi, Member Secretary.


 The terms of reference of the Committee was as under :-


a)    Recommendations for formulating guidelines to implement the provisions of General Anti-Avoidance Rules(GAAR) as per section 123 of the Direct Tax Code Bill, 2010; and


b)    Draft a circular as a safeguard so that the GAAR provisions are not applied indiscriminately in every case.


The Committee met for the first time on 6th March, 2012 and felt that the existing provisions of the Direct Tax Code Bill 2010(DTC) needed certain modifications and therefore various specific suggestions were made in this regard. These included suggestions on defining various terms as appearing in the DTC, changing the procedure of invoking the provisions of GAAR, prescribing time limits etc.


Subsequent to the first meeting, the Finance Bill 2012 was presented before the Parliament and it was gathered that most of the suggestions given in the first meeting were addressed in the Finance Bill 2012. The Committee thereafter examined the provisions related to GAAR in the Finance Bill 2012 as modified through Government amendments during the passage of the Bill in Parliament. The recommendations regarding guidelines/circulars have been made in light of the final provisions relating to GAAR in the Finance Act, 2012.


The Committee held several meetings between 06.03.2012 to 28.05.2012.


After exhaustive deliberations and broad based discussions with the officers, representatives of FII’s, members of the advisory committee and others stake holders, the Committee makes the following recommendations which would need to be split between Circulars and the Rules.


Proposals for inclusion in the guidelines


A)    Guidelines u/s 101


Section 101 of the Finance Act, 2012, provides that “the provisions of this Chapter shall be applied in accordance with such guidelines and subject to such conditions and the manner as may be prescribed”. The Committee makes the following recommendations to be incorporated in the guidelines.


a)    Monetary threshold



The committee feels that in order to avoid the indiscriminate application of the GAAR provisions and to provide relief to small taxpayers, there should be monetary threshold for invoking the GAAR provisions. In this regard, the following recommendation is made by the committee.


Only an arrangement or arrangements where the tax benefit through the arrangement(s) in a year to an assessee is above Rs. ___ lacs will be covered by GAAR provisions.


b)   Prescription of statutory forms



The committee feels that consistency of approach is essential in the procedures for invoking the GAAR provisions. It also feels that adequate safeguards should be provided to ensure that principles of natural justice were not violated and there is transparency in the procedures. Therefore, the committee is of the opinion that there should be prescribed statutory forms for the following:-


i)     For the Assessing Officer to make a reference to the Commissioner u/s 144BA(1) (Annexure-A)


ii)    For the Commissioner to make a reference to the Approving Panel u/s 144BA(4) (Annexure-B)


iii)   For the Commissioner to return the reference to the Assessing Officer u/s 144BA(5) (Annexure-C)


 (The drafts thereof have been prepared and enclosed as above)



c)    Prescribing the time limits



The committee feels that there should be absolute certainty about the time limits during which the various actions under the GAAR provisions are to be completed. Some of these time lines have been prescribed under the act under sections 144BA(1) and 144BA(13). For the remaining actions the following time lines are suggested by the committee :-


It may be prescribed that in terms of section 144BA(4), the CIT should make a reference to the Approving Panel within 60 days of the receipt of the objection from the assessee and in case of the CIT accepting the assessee’s objection and being satisfied that provision of chapter X-A are not applicable, the CIT shall communicate his decision to the AO within 60 days of the receipt of the assessee’s objection as prescribed under section 144BA(4) r.w.s. 144BA(5). No action u/s 144BA(4) or (5) shall be taken by the Commissioner after the period of six months from the end of the month in which the reference under sub-section 144BA(1) was received by the Commissioner.


B)   Recommendations regarding setting up of the Approving Panel u/s 144(BA)


Section 144BA(14) has empowered the CBDT to constitute Approving Panel consisting of not less than 3 members, out of which one member of the panel would be an officer of the level of Joint Secretary or above from the Ministry of Law and the others being the Income Tax Authorities of the rank of Commissioner and above. The committee deliberated on the constitution of this committee for efficient output and has made the following recommendations :-


(a)  To begin with, there should be one Approving Panel, which shall be situated at Delhi. Subsequently, the CBDT should review the number of Approving Panels required on the basis of the workload in the  FY 2014-15.




(b)  The Approving Panel should comprise of three members, out of which, two members should be of the level of Chief Commissioners of Income Tax and the third member should be an officer of the level of Joint Secretary or above from the Ministry of Law. All the members should be full time members.



(c)  The Approving Panel should be provided the secretariat staff along with appropriate budgetary and infrastructure support by the CBDT. The secretariat should be headed by an officer of the level of Joint/Additional Commissioner of Income Tax.


C)   Recommendations for the Circular on GAAR


a)    Explaining the provisions of GAAR


For the purpose of explaining the provisions of GAAR and better understanding thereof, the Committee suggests a detailed note to be included in the circular, which is enclosed as Annexure- D.


b)   Special provisions for Foreign Institutional Investors (FII’s)


Foreign Institutional Investors have expressed certain concerns regarding GAAR provisions. The committee met the representatives of Asia Securities Industry & Finance Markets Association and Capital Markets Tax Committee of Asia. After discussions, the representatives of these bodies gave following suggestions to resolve their apprehensions.


1.    To exempt Capital Market transactions entirely from the GAAR provisions


2.    A flat tax on FII’s gains without any distinction between various transactions could be considered.


3.    The tax authorities could attempt to clarify the details of each provision in the GAAR. For this, they gave comments on how the relevant provision may be clarified.


The committee considered the suggestions of the representatives. Option No. (1) & (2) above are not viable options as it is not permitted under the provisions of the Income Tax Act. However option (3) could be considered. For this purpose, safe harbour could be provided to the FII’s subject to the payment of taxes as per domestic law. Accordingly, the committee recommends the following.


Where a Foreign Institutional Investor (FII) chooses not to take any benefit under an agreement entered into by India under section 90 or 90A of the Act and subjects itself to tax in accordance with the domestic law provisions, then, the provisions of Chapter X-A shall not apply to such FII or to the non-resident investors of the FII.


Where an FII chooses to take a treaty benefit, GAAR provisions may be invoked in the case of the FII, but would not in any case be invoked in the case of the non-resident investors of the FII.


c)    Clarity regarding retrospective/prospective operations of the GAAR provisions



Certain apprehensions have been raised regarding the retrospective/prospective operation of the GAAR provisions. It may therefore be clarified that :-




The provisions of GAAR will apply to the income accruing or arising to the   taxpayers on or after 01.04.2013.




d)   Interplay between Specific Anti-Avoidance Rules (SAAR) and General Anti-Avoidance Rules (GAAR).




Concerns have been raised that there could be interplay between the SAAR and GAAR. The committee examined this issue and the recommendation of the committee is as below:-




While SAARs are promulgated to counter a specific abusive behavior, GAARs are used to support SAARs and to cover transactions that are not covered by SAARs. Under normal circumstances, where specific SAAR is applicable, GAAR will not be invoked. However, in an exceptional case of abusive behavior on the part of a taxpayer that might defeat a SAAR, as illustrated in Example No. 16 in Annexure E (or similar cases), GAAR could also be invoked.



e)    Definition of “connected person”




Concerns have been raised that the definition of “connected person” u/s 102 (5) is too broad and ambiguous. The committee recommends that it may be clarified that:-




“Connected person” would include the definition of “associated enterprise” given in section 92A, the definition of ‘relative’ in section 56 and the “persons” covered u/s 40A(2)(b).




f)     Concern regarding application of section 96(2)




Concerns have been raised in various fora that section 96(2) provides that an arrangement shall be presumed to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit. In view of this provision where only a part of the arrangement is to obtain a tax benefit, the tax authorities will treat the whole arrangement as an impermissible arrangement.




In order to allay the apprehensions of the taxpayers in this regard, the committee recommends that it must be clarified in the Rules that :-




Where only a part of the arrangement is impermissible, the tax consequences of “Impermissible Avoidance Arrangement” will be limited to only that part of the arrangement.


g)   Illustrative cases under GAAR



The committee felt that terms like, “Misuse or abuse”, “bona fide purpose” and “lacks commercial substance” may be explained by illustrations.  However it may be clarified that it should be only an indicative list and not an exhaustive list. The committee has recommended a few illustrative cases, which are given in Annexure-E.   The guidelines provided through examples are based on specific facts in the particular example. Whether GAAR may be invoked in any particular case would depend on the specific facts of that case.





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