The General Anti
Avoidance Rule (GAAR) was introduced in the Income-tax Act by the Finance Act,
2012. The substantive provisions relating to GAAR are contained in Chapter X-A
(consisting of sections 95 to 102) of the Income-tax Act. The procedural
provisions relating to mechanism for invocation of GAAR and passing of the
assessment order in consequence thereof are contained in section 144BA. The
provisions of Chapter X-A as well as section 144BA would have come into force
with effect from 1st April, 2014.
A number of representations were received
against the provisions relating to GAAR. An Expert Committee was constituted by
the Government with broad terms of reference including consultation with
stakeholders and finalising the GAAR guidelines and a road map for
implementation. The Expert Committee’s recommendations included suggestions for
legislative amendments, formulation of rules and prescribing guidelines for implementation
of GAAR. The major recommendations of the Expert Committee have been accepted
by the Government, with some modifications. Some of the recommendations
accepted by the Government require amendment in the provisions of Chapter X-A
and section 144BA .
In order to give effect to the recommendations
the following amendments have been made in GAAR provisions currently provided
in the Act:-
(A) The
provisions of Chapter X-A and section 1 44BA will come into force with effect
from April 1, 2016 as against the current date of April 1, 2014. The provisions
shall apply from the assessment year 2016-17 instead of assessment year
2014-15.
(B) An arrangement, the main purpose of which is
to obtain a tax benefit, would be considered as an impermissible avoidance
arrangement. The current provision of section 96 providing that it should be
“the main purpose or one of the main purposes” has been proposed to be amended
accordingly.
(C) The factors like, period or time for which
the arrangement had existed; the fact of payment of taxes by the assessee; and
the fact that an exit route was provided by the arrangement, would be relevant
but not sufficient to determine whether the arrangement is an impermissible
avoidance arrangement. The current provisions of section 97 which provided that
these factors would not be relevant has been proposed to be amended
accordingly.
(D) An arrangement shall also be deemed to be
lacking commercial substance, if it does not have a significant effect upon the
business risks, or net cash flows of any party to the arrangement apart from
any effect attributable to the tax benefit that would be obtained but for the
application of Chapter X-A. The current provisions as contained in section 97
are proposed to be amended to provide that an arrangement shall also be deemed
to lack commercial substance if the condition provided above is satisfied.
(E) The Approving Panel shall consist of a
Chairperson who is or has been a Judge of a High Court; one Member of the
Indian Revenue Service not below the rank of Chief Commissioner of Income-tax;
and one Member who shall be an academic or scholar having special knowledge of
matters such as direct taxes, business accounts and international trade
practices. The current provision of section 144BA ,that the Approving Panel
shall consist of not less than three members being income-tax authorities and
an officer of the Indian Legal Service has been proposed to be amended
accordingly.
(F) The directions issued by the Approving
Panel shall be binding on the assessee as well as the income-tax authorities
and no appeal against such directions can be made under the provisions of the
Act. The current provisions of section 144BA providing that the direction of
the Approving Panel will be binding only on the Assessing Officer have been
proposed to be amended accordingly.
(G) The Central Government may constitute one or
more Approving Panels as may be necessary and the term of the Approving Panel
shall be ordinarily for one year and may be extended from time to time up to a
period of three years. The provisions of section 144BA have been proposed to be
amended accordingly.
(H) The two separate definitions in the current
provisions of section 102, namely, “associated person” and “connected person”
will be combined and there will be only one inclusive provision defining a
‘connected person’. The provisions of section 102 have been proposed to be
amended accordingly.
Consequential amendments in other sections
relating to procedural matters are also proposed.
These amendments will take effect from 1st
April, 2016 and will, accordingly, apply in relation to the assessment year
2016-17 and subsequent assessment years.
