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Concerns arise as taxman invokes GAAR to question domestic deals – The Economic Times

For years, the General Anti-Avoidance Rule (GAAR) has been a tool in the taxman’s hands to go after foreign investors — particularly offshore fund managers —escaping tax by setting up letterbox companies in tax havens.

Foreign portfolio investors trading on Indian stock exchanges were told to pay tax as paper firms lacked substance.

But with tax havens slowly losing their charm and tax treaties between countries tightening, Indian tax officials are throwing the GAAR rule book at domestic companies they suspect are striking deals to evade tax.

In the past year, several notices have been served to local companies, with the Income Tax (I-T) Department invoking GAAR to question transactions such as mergers, deferred payment on deals and the way capital assets are sold, among other things.
“Along with the stance of the tax department, two recent rulings by the National Company Law Tribunal (NCLT) have come as a wakeup call to many corporates,” said senior chartered accountant Dilip Lakhani. “In these cases, NCLT held that GAAR provisions are applicable to transactions proposed in restructuring schemes.

Also, the tax department has turned proactive. It’s raising objections in many cases after receiving notices (on mergers) from NCLT. With amendment to the Companies Act, the tax office now comes to know of all mergers.”

Though GAAR should apply only to doubtful transactions where there is no substance, or to deals that would not be entered into in ordinary course of business, Lakhani said there are fears the department is resorting to GAAR to tax many transactions where there is tax saving.

Transactions that have attracted GAAR often include merging a loss-making company with a profitable group entity, thereby enabling the latter to take advantage of losses of
the transferor company. Even though the law allows such tax reduction as long as certain conditions are met, tax officials can, nonetheless, claim a deal was entered into purely with the objective of evading tax.

Another instance GAAR has been invoked relates to sale of capital assets where the buyer makes an immediate part payment, with the agreement that the balance would be paid after certain conditions are fulfilled. Even if the balance payment — received after a year or so — is exempt from tax by virtue of court or tribunal rulings, the I-T Department has taken the stand that the deal was done with the intention of avoiding tax. As a result, it claims tax on the full amount in the first year.

Hitesh Gajaria, head of tax, KPMG India, believes GAAR has sufficient inbuilt checks and balances and will be triggered only in exceptional cases of blatant tax avoidance. “GAAR can only be invoked where one of the main purposes of a transaction is tax avoidance.

Aabid & Co
Zayn Consulting P Ltd