New general anti-avoidance rules create taxing times

Tax authorities have been contending taxpayers are deploying various structures to obtain tax benefits. In order to bring such arrangements under their purview, General Anti-Avoidance Rules (GAAR) have been introduced in the Finance Act, 2012, to deal with aggressive tax planning.

Benefit test

Where an arrangement, or a part thereof, is entered into with the main purpose of obtaining a tax benefit, GAAR provisions will apply. Along with a main purpose test, one of the following should be satisfied for an arrangement to be termed as an impermissible avoidance arrangement (IAA):

• Creation of rights and obligations, which are not normally created; or

• Misuse or abuse of tax provisions; or

• Lack of commercial substance or deemed to lack commercial substance; or

• Carrying out an arrangement for a non-bona fide purpose

The provisions place responsibility on the tax office to prove that the taxpayer’s main intent of entering into such an arrangement was to obtain a tax benefit. By invoking GAAR, the tax office can levy additional taxes or deny tax benefits on the IAA.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune and Ahmedabad. Pranay Bhatia is an associate partner at the firm and Janhavi Sharma is an associate.