Budget 2012: Highlights - General Anti Avoidance Rules (GAAR)

Author:Mr Anil Harish
Profession:D.M. Harish & Co.
 
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The Finance Bill 2012 proposes to introduce a Chapter X-A to the Current Income-tax Act, 1961 on General Anti-avoidance Rules (GAAR)

GAAR seeks to provide wide discretionary powers to the revenue authorities in taxing impermissible avoidance arrangements‟ including the power to disregard entities in a structure, reallocate income and expenditure between parties to the arrangement, alter the tax residence of such entities and the legal situs of assets involved, treat debt as equity and vice versa, etc. By doing so, the revenue authorities may deny tax benefits even if conferred under a tax treaty.

An impermissible avoidance arrangement‟ is defined as an arrangement where the main purpose (or one of the main purpose) is to obtain a tax benefit and which contains any of the following elements:

a. Non-arm‟s length transactions:

b. Misuse or abuse of the Act: However, the Budget does not provide any clarity on what will constitute a misuse or abuse.

c. Non - bona fide purpose:

d. Lack of commercial substance: For eg. Arrangements that include round trip financing involving transfer of funds between parties...

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