SKP Tax Alert
Volume 9 Issue 8 | 28 June 2016
Investments and Arrangements now grandfathered upto 1 April 2017 from GAAR Applicability

Recently, the Central Board of Direct Taxes (CBDT) amended Rule 10U with respect to non-applicability of General Anti-Avoidance Rules (GAAR) vide notification No. 49/2016/F.No. 370142/10/2016 – TPL dated 22 June 2016. Based on the amendment, now GAAR provisions shall not apply to:
  • Any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by any person after 1 April 2017, in respect of transfer of investments made before the 1 April 2017 by such a person; Earlier, this date was 30 August 2010.
  • The tax benefit obtained before 1 April 2017 from any ‘arrangement’ entered into prior to this date. Earlier, this date was 1 April 2015.
The above relaxations are known as grandfathering provisions.
Thus, based on the above relaxation, any income arising after 1 April 2017 on the transfer of investments made before 1 April 2017 would be eligible for tax benefits provided under the Income Tax Act, 1961 or the tax treaty and GAAR provisions would not trigger.

However, with respect to the arrangements entered into prior to 1 April 2017, mainly for the purpose of obtaining tax benefits, the benefits can be availed only
upto 1 April 2017. Any tax benefit arising on or after 1 April 2017, from the old arrangements, would fall under the scrutiny of GAAR.

In addition to above, the CBDT has also asked the general public and stakeholders to provide their inputs on the provisions of GAAR in respect of the clarity that is required from an implementation perspective by 30 June 2016. Hence, it seems that the new guidelines for the implementation of GAAR are on the way and may be announced soon.

 
SKP's comments
The new notification only rationalises the date of grandfathering which is expected to be in line with the implementation of GAAR. As GAAR provisions will apply from 2017, we would like to highlight the following issues which may crop up from these provisions:
  • The term ’arrangement’ is a wider term and may include ’investments’ within its ambit. Hence, it is preferable that in the guidelines to be notified, this aspect is suitably clarified that the applicability of GAAR to ‘arrangement’ would not extend to investment.
  • Since grandfathering would not be available in respect of tax benefits obtained after 1 April 2017 even if the ‘arrangement’ entered into is before 1 April 2017, one would have to take another look at the transactions between group entities leading to passive incomes within the group or shared services, royalty payments, managerial service payments, etc. to ensure that it withstands the GAAR scrutiny.
  • For any upcoming or new arrangements, it is imperative that transaction is thoroughly examined from the perspective of GAAR and commercial substance is established. One possible alternative is to obtain an Advance Ruling and have certainty. This would help avoid long drawn litigation from a GAAR perspective after the arrangement is entered into.

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