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CBDT notify the rules for application of GAAR

26 September 2013

Background
The General Anti Avoidance Rules (GAAR) had first
been introduced in the Direct Taxes Code (DTC) in
2009 to curb Impermissible Avoidance Arrangement
(IAA) entered into by a person to avoid taxes. The
GAAR had been introduced to deal with aggressive tax
planning involving use of sophisticated structures.

A Foreign Institutional Investor (FII):

Although originally forming a part of the DTC, now it is

a part of the Income-tax Act, 1961 (the Act). Under the
current provisions, Chapter X-A, dealing with the
provisions of GAAR would come into force with effect
from 1 April 2015 (Financial Year 2015-16).
The Central Board of Direct Taxes (CBDT) has today
notified the rules relating to application of GAAR. The
rules notified deal with the following:

An arrangement where the tax benefit arising to all

the parties to the arrangement in the relevant
assessment year does not exceed INR 30 million in
aggregate.

Who is an assessee under the Act;

Who has not taken benefit of an agreement

referred to in Section 90 or Section 90A of the
Act;

Who has invested in listed securities, or

unlisted securities, with the prior permission of
the competent authority, in accordance with the
Securities Exchange Board of India (Foreign
Institutional Investor) Regulations, 1995 and
such other regulations as may be applicable, in
relation to such investments;

A non-resident person who has investment by way

of offshore derivative instruments or otherwise,
directly or indirectly, in a FII;

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
investment made before the 30 August 2010.

The provision of GAAR shall not apply

to:

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GAAR to apply to tax benefit obtained

from the arrangement on or after 1 April
2015

Details of tax benefit to the taxpayer and all parties

to the arrangement;

The GAAR provisions shall apply to any arrangement,

irrespective of the date on which it has been entered into, in
respect of the tax benefit obtained from an arrangement on
or after the 1 April 2015. This is, however, without prejudice
to exclusions provided to income arising from transfer of
investment made before the 30 August 2010.

Whether obtaining the tax benefit is the main

purpose of the arrangement or part of the
arrangement;

Determination
of
consequences
impermissible avoidance arrangement

of

Where a part of an arrangement is declared to be an

impermissible avoidance arrangement, the consequences
in relation to tax shall be determined with reference to such
part only.

Mechanism for reference of cases for

application of GAAR
The Assessing Officer (AO) shall, before making a
reference to the Commissioner, issue a notice in writing to
the taxpayer. The notice shall contain the following:
Details of the arrangement to which GAAR provisions
are proposed to be applied
The tax benefit arising under the arrangement
The basis and reason for considering that the main
purpose of the identified arrangement is to obtain tax
benefit
The basis and reasons why the arrangement satisfies
the condition to consider such arrangement as an IAA;
and
The list of documents and evidence relied upon in
respect of forming basis and reasons as stated above.
The AO shall make a reference to the Commissioner in
Form 3CEG which contains the following:
Name and address of the taxpayer;
PAN of taxpayer;
Constitution (status) of the taxpayer;
Residential status of the taxpayer;
AY in respect of which the proceedings relating to GAAR
are proposed to be invoked;
Factual matrix of the arrangement and details of other
parties to the arrangement;

Brief facts in respect of computation of tax benefit;

Whether a notice has been served on the taxpayer;

Indicate which of the prescribed conditions is
satisfied by the arrangement;
Brief reasons for
arrangement as IAA;

seeking

declaration

of

Tax consequence likely to arise if arrangement is

declared as IAA; and
The last date of completion of assessment/reassessment proceedings.
The Commissioner, if satisfied that provisions of
GAAR are not required to be invoked with reference to
an arrangement, after considering reference received
from AO or reply of the taxpayer in response to notice
issued, shall issue directions to AO in form 3CEH
mentioning, inter -alia, basis of finding that GAAR
provisions are not applicable.
The Commissioner for the purpose of further
reference, shall record his satisfaction regarding the
applicability of the provisions of GAAR in Form No.
3CEI containing the prescribed particulars (similar to
the ones as required to be made by the AO as
mentioned above along with certain other prescribed
details) and enclose the same along with the
reference being made to the Approving Panel.

Time limits
No directions shall be issued by the Commissioner
after the expiry of one month from the end of the
month in which the date of compliance of the notice
(notice providing an opportunity of being heard)
expires.
No reference shall be made by the Commissioner
to the Approving Panel after the expiry of two
months from the end of the month in which the final
submission is received from the taxpayer in
response to the notice issued to him.
The Commissioner shall issue directions to the AO
in Form No.3CEH,

When reference is received from AO - within a

period of one month from the end of month in
which the reference is received by him; and

2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
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When reply of the taxpayer is received in response

to the notice issued - within a period of two months
from the end of month in which the final submission
of the taxpayer in response to the notice issued by
the Commissioner is received.

Our comments
Keeping in line with measures for building investors
confidence, the GAAR Rules have provided for monetary
threshold, non-applicability of the GAAR to the FIIs which
do not take the treaty benefit and grandfathering of
investments made before 30 August 2010.
In line with the Statement issued by the Finance Minister
on 14 January 2013, the Rules cast an obligation on the AO
to undertake thorough exercise before initiating the GAAR
proceedings and provides for an opportunity to the taxpayer
to prove that the arrangement is not an IAA. The Rules also
provide for definite time limit for conclusion of the
proceedings.
The Rules if implemented in true spirit will help allaying the
investors fear about the uncertainty with regards to the
implementation of the GAAR provisions.

2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(KPMG International), a Swiss entity. All rights reserved.

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(KPMG International), a Swiss entity. All rights reserved.
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2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(KPMG International), a Swiss entity. All rights reserved.