Question

Q46) Consider the following statements about General anti avoidance rules (GAAR). Identify the wrong statement.

• A. a)Parthasarathi Shome committee was set up in 2012 to look in to the matters of GAAR
• B. b)GAAR tries to avoid the misuse of DTAA (double taxation avoidance agreement)
• C. c)Under GAAR income tax department will have very limited powers.
• D. d) None of these

Answer 1

The correct option is C

c)Under GAAR income tax department will have very limited powers.

Answer 46: C

Explanation: GAAR refers to General Anti-Avoidance Rules. These rules target any transaction or business arrangement that is entered into with the objective of avoiding tax. The objective is to check aggressive tax planning.
Implication of GAAR implementation The implication of GAAR is that the Income-tax department will have powers to deny tax benefit if
a transaction was carried out exclusively for the purpose of avoiding tax. For example, if an entity is set up in Mauritius with the sole
intention of claiming exemption from capital gains tax, the tax authorities have the right to deny the claim for exemption provided
under the India-Mauritius tax treaty. How would it work? The Income Tax Commissioner will be empowered to declare an arrangement as an Impermissible Avoidance Arrangement (IAA) if: The whole, a step or a part of the arrangement has been entered with the objective of obtaining tax benefit, and The arrangement creates rights and an obligation not normally created in arm’s length transactions or results in direct or indirect misuse or abuse of the provisions of the code or lack commercial substance in whole or part, or is not bonafide. This is so far reaching in nature that almost each and every transaction, which results in saving tax could be regarded as an IAA) This means that GAAR enables tax authorities to declare any arrangement entered into by a taxpayer as an IAA) If it is so declared, then the tax authorities can disregard, combine or re-characterize any step of such arrangement or the entire arrangement, disregard any accommodating party involved in such arrangement, treat the transaction as if it had not been entered into or carried out, reallocate any income or expenditure, look through any arrangement by disregarding any corporate structure, re-
characterize debt as equity or vice-versa and so on. In effect, for tax purposes, any transaction can be treated in a manner different from the manner in which it is carried out if it is regarded as an IAA) Parthasarathy Shome Panel. The Parthasarathy Shome panel was formed by PM of India in 2012, for drawing up the final guidelines on GAAR and mainly to bring about tax clarity and address the concerns of foreign investors. Instead of only FIIs, the panel was asked also to look into issues pertaining to all non-resident tax payers. With various recommendations to revive the inflow of foreign capital, the panel has advocated postponement of the controversial tax provision by three years till 2016-17 along with abolition of capital gains tax on transfer of securities.