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Gaar ppt

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  • 1. Indian General Anti-Avoidance Rules An Overview Dinesh Kanabar 7 July 2012
  • 2. How it all Started? 2
  • 3. Evolution Pre-GAAR Era Jurisprudence Tax Planning vs. Tax Avoidance vs. Tax Evasion / Form vs. Substance Treaty Shopping Specific Anti-avoidance Rules Thin Capitalization © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3
  • 4. Tax Planning vs. Tax Avoidance vs. Tax Evasion ‘Roller Coaster’ from “post-independence” to 2011…… 60+ years … 7 Apex Court decisions !! Arvind Narottam 1967 Azadi Bachao Andolan 1988 Raman & Co. 2003 1985 McDowell © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1989 Playworld Electronics Vodafone 2012 2010 Walfort 4
  • 5. Tax Planning vs. Tax Avoidance vs. Tax Evasion Raman & Co. (1967) “Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act. Legislative injuction in taxing statues may not, except on peril of penalty, be violated, but it may lawfully circumvented” © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 5
  • 6. Tax Planning vs. Tax Avoidance vs. Tax Evasion McDowell (1985): “Constitutional Bench” decision “Main” judgment of Ranganath Misra (on behalf of Full Court)  Permissible: Tax planning within legal framework  Impermissible: ‘‘Colourable devices’, ‘dubious methods’ and ‘subterfuges’ under the guise of planning “Supplementing” decision by Chinappa Reddy ( post concurrence with “majority” decision!!) Blurred distinction between “tax avoidance” and “tax evasion” Dismissed observations in Raman & Co Chinappa Reddy’s view: Reopened debate of Ramsay vs. Duke of Westminister © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 6
  • 7. Tax Planning vs. Tax Avoidance vs. Tax Evasion Aftermath of “McDowell”: ‘Implied’ opposition to Chinappa Reddy’s view Arvind Narottam (1988) “....no amount of moral sermons would change people’s attitude to tax avoidance” Playworld Electronics (1989) “One should avoid subverting the rule of law” Battlelines drawn for “correct” reading of McDowell © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7
  • 8. Tax Planning vs. Tax Avoidance vs. Tax Evasion Azadi Bachao Andolan (2003) • Chinappa Reddy’s “radical” view militates against the majority judgment • Raman & Co (1967) “relevant even today” / Duke of Westminister “alive” & “kicking” Every arrangement reducing the tax burden not to be looked down Attempts to reverse Azadi • Review petition filed before the two member Supreme Court Bench: Dismissed in January 2004 • Curative Petition placed before a five member Supreme Court Bench: Dismissed in limine in December 2004 Correctness of Azadi Bachao Andolan still doubted !! © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 8
  • 9. Tax Planning vs. Tax Avoidance vs. Tax Evasion Walfort (2010) reaffirms Azadi Bachao Andolan “Even assuming that the transaction was pre-planned there was nothing to impeach the genuineness of the transaction. With regard to the ruling in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 1482 (SC), it may be stated that in the later decision of the Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of the Supreme Court in McDowell & Co. Ltd.’s case (supra)” © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 9
  • 10. Tax Planning vs. Tax Avoidance vs. Tax Evasion Vodafone (2012)….finally lays to rest “McDowell spirit”  No conflict between McDowell and Azadi Bachao Andolan  Chinappa Reddy’s views only in the context of “artificial and colourable devices”  Reaffirmed Westminister: Courts cannot go behind a genuine document to some supposed underlying substance  Preferred “look at” over “look through” © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 10
  • 11. Tax Planning vs. Tax Avoidance vs. Tax Evasion -- Post Vodafone... High Energy Batteries (Madras HC): “Sale and Lease Back”  Transaction of sale and lease back not sham.  “Look at” principle applied AAR Ruling: Buyback of shares  “Tax Avoidance” / “colourable device”  Results in “dividend” and not “capital gains” Debate intensifies ……rather than subsiding !! © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 11
  • 12. Treaty Shopping / Thin Capitalisation Treaty Shopping - Azadi (2003) / Vodafone (2012)  Treaty Shopping permissible  Treaty benefit to be denied only on account of LOB Article / Antiavoidance rules in the domestic law Thin Capitalization - Besix Kier (2010)  Re-characterization of Debt as equity not permissible in absence of Thin Capitalization Rules © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 12
  • 13. Pre GAAR Era - Specific Anti-avoidance Rules Deemed Dividend Clubbing of Income Stamp duty value of land and building Deemed Gift Transfer Pricing Dividend / Bonus Stripping © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 13
  • 14. GAAR – Around the world  Growing international concern over tax evasion and tax avoidance  Global economic slowdown resulting in lower tax collections – Governments looking to widen tax base Australia South Africa UK (Proposed) 2006 1981 2011 GAAR 1988 Canada © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2008 China 2013 India 14
  • 15. Indian GAAR 15
  • 16. Evolution of GAAR es lin de ui 12 G e n ft ra Ju D 28 a Fin , Act y Ma 201 12 2 Sta 28 nce Doctrine of “substance over form” ndin gC Rep ommit te e ort 9M arch 12 DT C DT 20 09 C 20 – 10 12 – Au 30 g 09 Au g 10 Finance Bill 2012 16 Mar 12 Modeled on South African GAAR © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Vodafone’s “six factor test” nullified Finance Minister in Budget Speech “I propose to introduce GAAR in order to counter aggressive tax avoidance schemes….” Explanatory Memorandum to Finance Bill, 2012 ….keeping in view the aggressive tax planning with the use of sophisticated structures, a need for statutory provisions so as to codify the doctrine of "substance over form"…… 16
  • 17. GAAR -- Comparison of key provisions Particulars DTC 2009 Implementation Date 1 April 2011 DTC 2010 1 April 2012 1 April 2013 Taxpayer Tax Authorities Taxpayer Taxpayer Scope Wide Wide Reference to approving panel NO Commissioner Option to obtain AAR ruling © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NO Finance Act 2012 1 April 2012 Onus of proof Final authority to invoke GAAR Finance Bill 2012 NO Commissioner NO Wider than DTC Wider than DTC yes yes Approving Panel (Only Commissioners) Approving Panel (Commissioners + Jt.Secratary) NO YES 17
  • 18. Indian GAAR – A Snapshot “Main purpose” or one of the “main purposes” is to obtain a “tax benefit” AND Not at “arm’s-length” OR “Misuse/abuse" of tax provisions OR Lacks “commercial substance” OR Not for bona-fide purposes Impermissible Avoidance Arrangement (IAA) Consequences Disregard / combine / re-characterize whole / part of the arrangement Disregard corporate structure Deny treaty benefit Re-assign place of residence / situs of assets or transaction Re-allocate income, expenses, relief, etc. Re- characterize Equity- Debt, Income, Expenses, relief, etc. Applies to both Indian Residents and Non-Residents GAAR to override Treaties © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 18
  • 19. GAAR Guidelines  Committee formed under the chairmanship of DGIT (IT)  “Draft” guidelines  Issued on 28 June 2012 with 21 illustration:  PM’s review pending…. Will GAARs be….deferred....diluted…. or deleted?  Positives  Clarity in meaning of “connected person”  GAARs to apply to FIIs and not to “P-Note” holders  Obliterating fears on section 96(2): Consequences of treating part of an arrangement as “impermissible”  “Tax Mitigation” permissible  Thin Capitalisation applicable only qua “connected persons”  Overseas investments: Non-applicability of GAARs to parking of dividends 2% Rise in rupee… 439 points rise in BSE Sensex on 29 June!! © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 19
  • 20. More to be done Increased objectivity Define “direct or indirect” / “misuse or abuse” / “bonafide purpose” / “commercial substance” Recommendation of Parliamentary Standing Committee: Interplay of GAARs and Tax Treaties Increased clarity on GAARs vs. SAARs Key: Implementation at “ground level” / Increase India’s attractiveness as an investment destination © 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Grandfathering: Non-applicability to “pre-2013” structures 20
  • 21. Hope is eternal… Finance Minister’s Speech while introducing GAAR provisions “I propose to introduce a General Anti-Avoidance Rule in order to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel” Finance Minister during in Lok Sabha debate “… It is not made for harassment. It is not for harassing the honest taxpayers but we shall have to take action against those who are taking advantage to avoid taxes…” Parliamentary Standing Committee Report Due consultative process with all stakeholders would be followed before guidelines will be formulated Finance Secretary to ET (7 May 2012): "It won't be easy for assessing tax officers to invoke GAAR” © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 21
  • 22. Questions … Answers… & © 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss Private Limited, an reserved. limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2009 KPMG India entity. All rights Indian private 22 22
  • 23. Thank You The information contained herein is of a general nature. The content provided here treats the subjects covered here in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. A detailed analysis of the tax and regulatory implications should be done prior to implementation in order to determine the feasibility of the transaction at the time of implementation. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Specialist advice should be sought with respect to any individual circumstances. © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 23