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GAAR

Team Members Arun Kumar Rushali Lokhande Kamiya Gulati
08 August 2013

Contents
Contents

Background Existing Tax laws in India What is GAAR? GAAR in India Proposed GAAR & its Objective Key Issues! Effects & Afterthoughts Shome Committee proposals & Status Vodafone case Conclusions
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GAAR

seriously undermines the achievements of the public finance objective of collecting revenues in an efficient. Individual or Organizations tend to save on taxes.Background GAAR.Background Tax avoidance like tax evasion. Tax Avoidance and Tax Evasion. Loop holes in tax laws GAAR Page 3 . equitable and effective manner Thin line differentiates Tax Planning. Tax Benefit.

Existing Tax Laws in India Direct Tax Income Tax Wealth Property Corporate Etc.. SAAR – Specific Anti Avoidance Rules : SAAR is a set of rules which target specific ‘known’ arrangements of tax avoidance. Indirect Tax Excise Duty Sales Tax Service Tax Custom Duty Etc. GAAR Page 4 ..

Canada.Countries like Australia. Germany. GAAR is not a new word.What is GAAR? GAAR – General Anti Avoidance Rules GAAR denies the tax benefits to Transactions/ Arrangements. France & South Africa have GAAR More than 30 Countries have introduced GAAR Other Emerging Economies have started introducing GAAR. GAAR Page 5 .

Increase in FDI Increase in number of Shell companies in Countries with Low or No Tax and having DTA or treaty with India Indian Business becoming GLOCAL Need for robust tax laws to counter tax avoidance GAAR Page 6 .since 1991.GAAR in India Liberalized economy.

Proposed GAAR.DTC 2010 GAAR to be invoked on satisfaction of prescribed conditions: an arrangement to obtain a tax benefit transactions not at arm’s length misuse or abuse of the provisions of DTC Lacking commercial substance defined to include situations where there is a: Significant tax benefits without significant effect upon business risk or net cash flows Legal substance or effect differs from legal form It involves or includes: Round trip financing Any accommodating or tax indifferent party GAAR Page 7 .

Effectively counter the taxpayers ‘out of the box thinking’ in devising new means of tax avoidance.Objective Insist upon the principal of. Target tax evaders.” Bar companies from aggressive tax planning.Proposed GAAR. “substance over form. GAAR Page 8 .

GAAR can be invoked on past arrangements irrespective of the fact that the arrangement has been approved by the tax officer or subjected to judicial review. Grants discretion to the tax authorities Has broader application and lacks clarity The onus of proving innocence is with taxpayer. There is no cut-off date for applicability of GAAR provisions.Key Issues GAAR provision is sweeping in nature. GAAR Page 9 .

Internal and External Pressures After thoughts: GAAR was postponed to at least 2013 Expert Committee under Dr.Effects & After thoughts ! Effects: FII’s pulled out over a One Billion US$ from Indian Market Indian Rupee depreciated to a new low Indian Stock market went numb State of depression in Indian companies.Parthasarthi Shome formed Shome Committee submits draft proposal in Sept 2012 & final recommendations in Oct 2012 GAAR Page 10 .

Highlights Overarching principle Deferment of GAAR – 3 years Monetary threshold of Rs. 3 crores Grandfathering of Investments Main purpose test Provide negative list of transactions GAAR Page 11 .Shome Committee Proposals EC Proposals.

EC Proposals.Highlights SAAR vs GAAR GAAR vs Limitation of Benefit clause (LOB) Withholding of taxes Definition of “connected persons” Constitution of Approving Panel Reporting Requirement Investors of FII’s GAAR Page 12 .Shome Committee Proposals contd..

An Example The bone of contention was whether transfers of shares of a foreign company which indirectly held shares of an Indian company was taxable in India.Vodafone case. GAAR Page 13 .

An Example GAAR Page 14 .Vodafone case.

An Example GAAR Page 15 .Vodafone case.

Vodafone case.An Example Key Principles Emanating from SC Ruling Tax Planning with in the framework of law is permissible Separate Entity Principle Look At Test Look Through Provision Situs of Shares of CGP Certainty is integral to rule of law GAAR Page 16 .

Look At Test To ascertain the true legal nature of the transaction Factors to be kept in mind when applying this test the concept of participation in investment the duration of time during which the holding structure exists the period of business operation in India the generation of taxable revenues in India the timing of Exit the continuity of business on such exit GAAR Page 17 .

Look Through Provision Scope of Section 9 so as to cover Indirect transfer of Capital Assets – contention by Revenue Authorities Section 9(1)(i) – of the Act explained that income dealt with in each sub clause is distinct & independent of the other Section 9(1)(ii) – refers to the income arising from “transfer of capital asset situate in India” No use of words “Indirect transfer” GAAR Page 18 .

Conclusion GAAR A make or Break Situation GAAR Page 19 .

1966 GAAR Page 20 . taxes teach him he can't leave it behind either. The Second Neurotic's Notebook. ~Mignon McLaughlin.Philosophy teaches a man that he can't take it with him.