Developments on the GAAR

The Shome Committee recently released its final report, which
can be downloaded from this link. (We had discussed the recommendations of the earlier
report on this blog, here.) Following this, the Ministry of Finance has
clarified that some of the recommendations of the Committee will be implemented
by means of suitable amendments to the provisions as presently enacted. It
appears that the Government has decided that the implementation of the GAAR
will be delayed, so that the provisions come into force from April 1, 2016. Among
the other key decisions taken by the Government are the following:
The definition of an impermissible avoidance arrangement will
be amended, such that only those arrangements will fall within the scope of the
provision which have “the main purpose” (as opposed to “the main purpose or one
of the main purposes”) of obtaining a tax benefit.
The Constitution of the Approving Panel has been modified, and
the Panel shall consist of one retired High Court Judge, one IRS officer not
below the rank of Chief Commissioner, and one expert academician or scholar
having expertise in direct taxes, accounts or international trade.
Directions issued by the Approving Panel shall be binding on
the assessee as well as the Income-tax authorities (as opposed to the current
provision that the directions shall be binding only on the Income-tax
The Approving Panel will be permitted to consider, amongst
other factors, “the 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
.” These factors may be relevant but will not
be sufficient to determine whether the arrangement is an impermissible
avoidance arrangement.
Investments made before August 30, 2010 will be grandfathered,
and protection is provided to FIIs and non-resident investors in FIIs

The implications of the Finance Ministry’s decisions have been discussed
in several articles, including those in the Business Standard, and the HinduBusiness Line.

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Mihir Naniwadekar

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