Applicability of general anti-avoidance rules clarified

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The Central Board of Direct Taxes (CBDT) recently released a circular providing clarifications in response to queries raised by stakeholders on the implementation of general anti-avoidance rules (GAAR).

Applicability of general anti-avoidance rules clarifiedThe GAAR provisions, which were introduced in the Income Tax Act, 1961, by the Finance Act, 2012, are scheduled to come into force from 1 April 2017. GAAR confers broad powers on the tax authorities to deny tax benefits (including those applicable under tax treaties), if the benefits arise from arrangements that are “impermissible avoidance arrangements”. The CBDT has also amended the Income Tax Rules, 1962, to create the necessary procedures for the application of GAAR and the conditions under which it will not apply.

Below are some important clarifications contained in the circular:

GAAR versus specific anti-avoidance rules

Since specific anti-avoidance rules (SAAR) may be inadequate to address all situations of tax abuse, the GAAR provisions may be invoked even in cases where SAAR provisions exist.

GAAR versus limitation on benefits clause

The circular extends the same logic to the application of the GAAR provisions to arrangements which are covered under a double taxation avoidance agreement (DTAA) which includes a limitation on benefits (LOB) clause as an anti-avoidance measure. However, in situations where the LOB provision in the DTAA is a sufficient to combat abuse, the GAAR provisions will not apply.

Choice of implementation method

The GAAR provisions will not interfere with the right of the taxpayer to choose a method of implementing a transaction or arrangement.

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