At the start of this year, India announced that its much debated General Anti-Avoidance Rules (“GAAR”) will be implemented 1 April 2017, affecting all future India-focused tax planning strategies. Under such provisions, an arrangement where the main purpose is to obtain a tax benefit can be declared an “impermissible avoidance arrangement” if it also satisfies at least one of the four specified tests:
- the arrangement is not at arm’s length;
- it involves the misuse or abuse of tax laws;
- it lacks or is deemed to lack commercial substance; or
- it has not been carried out for a bona fide purpose.
The GAAR provisions, if invoked, could potentially override the provisions of existing double taxation avoidance agreements. This brings uncertainty as to how an individual arrangement will be perceived, and the impending implementation of GAAR has been cause for concern for investors for some years now.
GAAR would potentially apply to any arrangement, regardless of the date on which it has been entered into, in respect of the tax benefit obtained from an arrangement on or after 1 April 2017. GAAR provisions shall not apply to investments made before 1 April 2017.
On 27 January 2017, India’s Central Board of Direct Taxes issued a circular clarifying specific points in relation to the implementation of GAAR, including, but not limited to, the following:
- GAAR will not be invoked merely because an entity is set up in a tax favorable jurisdiction if the main purpose is not to obtain a tax benefit.
- If a case of avoidance is sufficiently addressed by the Limitation of Benefit (LOB) test in the treaty, there shall not be an occasion to invoke GAAR.
- Grandfathering from GAAR will be available to investments made before 1 April 2017, even for instruments which are compulsorily convertible, assuming that the terms of such instruments were finalized at the time of issuance of such instruments.
- Lease contracts and loan arrangements are not covered under the grandfathering rules.
- GAAR will not apply to an arrangement where the aggregate tax benefit arising in a tax year to all the parties to the arrangement does not exceed INR30m (US$450k). In assessing aggregate tax benefit, only tax benefits arising in the Indian jurisdiction would be considered, tax benefits should be applicable to a specific tax year and should take into account the impact on all the parties to an arrangement.
- GAAR shall not apply if a particular arrangement is permitted by the Indian Authority for Advance Rulings in respect of the applicant or in the event that the tax implications of an arrangement have been explicitly and adequately considered at the time of sanctioning the arrangement by the court or National Company Law Tribunal in India.
Over the course of recent years, many India-focused investment entities have opted for Singapore establishment as a tax efficient option that is less likely to trigger concerns under GAAR. While earlier this year the Singapore-India DTA has been renegotiated to progressively close off on the capital gains exemption, Singapore remains an important jurisdiction for India-focused structuring due to various other reasons, including GAAR, due to the substance requirements under the Singapore-India DTA.
Implications relating to the introduction of GAAR will only be seen once actions are taken based on its implementation. The investor community awaits further developments in this regard.