It is now over four years since the first draft of the General Anti-Avoidance Rule (GAAR) was released as part of the draft Direct Taxes Code (DTC). While it was originally intended to form part of the DTC, it was later made part of the Income-tax Act, 1961, by the Finance Act, 2012. However, due to widespread concerns over its provisions and its overall impact on investor sentiment, its provisions were deferred, first by a year and thereafter until April 1, 2015. There have been concerns as to whether, given the aggressive nature of the Indian Revenue, GAAR would be implemented with the maturity it deserves.
In the meantime, the GAAR provisions were also closely examined by an expert committee under the chairmanship of Parthasarathi Shome, which made several key recommendations to ensure that an appropriate balance is struck between the tax authorities’ need to scrutinise and re-characterise abusive transactions and the taxpayers’ need for simplicity and certainty in the tax system. Several of these recommendations were incorporated into the statute by the Finance Act, 2012. A few were incorporated in the rules notified last week, and it is expected that others will form part of the guidelines contemplated under GAAR. On some of the recommendations clarity is yet to emerge; more important of these are the recommendations with regard to the grandfathering provisions and the continued applicability of the India-Mauritius tax treaty.
The recently issued rules on GAAR mark an important step in India’s move towards operationalising its GAAR regime. In addition to several procedural provisions, they also provide the operational framework within which GAAR will be applied. Specifically, important areas such as the monetary threshold for applicability of GAAR, its applicability to foreign institutional investors and the grandfathering of past investments/arrangements have been dealt with in the rules.
The monetary threshold for applicability of GAAR is an important aspect with widespread consequences. In this regard, the rules provide that GAAR will not apply to arrangements where the tax benefit in the relevant year does not exceed R3 crore. This threshold has limited significance in the context of large corporates and may only protect individuals and small businesses from the ambit of GAAR. While this threshold is in line with the Shome Committee recommendations, one hopes that unlike other monetary limits set out in the Act, this threshold is suitably revised from time to time to take into account the impact of