GOI’s decision
Under the current provisions of the Act, the chapter on GAAR was to be effective from Financial Year starting from 1st April, 2013. The GOI has deferred the implementation of GAAR provisions by 2 years and hence the same would be made effective from Financial Year starting from 1st April, 2015.

2. Monetary Threshold
   
   EC Recommendation
   EC had recommended that GAAR provisions should be invoked only where a monetary threshold of INR 30 Million (equivalent to approx USD 0.60 Million) of tax benefits in a year is breached. 
   
   GOI’s decision
   The GOI has accepted the said recommendation.
   
   SKP’s comment
   While the recommendation has been accepted, the manner of computation of such tax benefit is yet to be prescribed.
   
   
3. Main purpose test and part arrangement
   
   EC Recommendation
   EC had recommended that provisions of GAAR should be invoked only in case of arrangements where the “main purpose” (and not one of the main purposes) was to obtain tax benefit. 
   
   Further, EC had also recommended that where only a part of the arrangement was impermissible, the tax consequences of an “impermissible avoidance arrangement” should be limited to that portion of that part of the arrangement and not the entire arrangement.
   
   GOI’s decision
   The GOI has accepted the said recommendations.
   
   
4. Grandfathering of investments (and not arrangements)
   
   EC Recommendation
   EC had recommended that all investments (and not arrangements) existing as on the date of commencement of GAAR provisions should be grandfathered, so that on exit (sale of such investments) on or after the said date, GAAR provisions are not invoked for examination leading to denial of tax benefit.
   
   GOI’s decision
   The GOI has partially accepted the above proposal. Grandfathering has been provided for investments existing on or before 30th August, 2010 (ie the date on which the Direct Tax Code bill was first introduced).
   
   SKP’s comment
   Readers may recollect that the GAAR provisions were first proposed in the Direct Tax Code Bill whose fate now lies uncertain as the same has been delayed by more than 2 years now.
   
   
5. Foreign Institutional Investors (‘FII’)
   
   EC Recommendation
   EC had recommended that GAAR provisions should not apply to FIIs who choose not to obtain any benefit under Tax treaty and subject itself to Act.
   
   GOI’s decision
   The GOI has accepted the said recommendation.
   
   SKP’s comment
   It is pertinent to note that in case where FIIs chose to be governed by the provisions of the Act so as to be out of ambit of GAAR, the same would be not advantageous to them as there would not be significant advantage to the FII under the Act.
   
   
6. Investors of FIIs
   
   EC Recommendation
   EC had recommended that whether or not FII chooses to take benefit of the Tax Treaty, the GAAR provisions should not be invoked against the non-resident investors who have invested in FIIs. It had been recommended that such non-resident investors would also include persons holding offshore derivative instruments ie Participatory Notes issued by FII.
   
   GOI’s decision
   The GOI has principally agreed that GAAR provisions would not apply to Non Resident investors in FIIs.
   
   SKP Comment
   There is no specific mention of Participatory Notes in the statement issued by the GOI. However, subsequent news reports seem to indicate that these too would be exempt from GAAR. However, one needs to wait for a formal clarification from the Govt on this issue.
   
   
7. GAAR vs Specific Anti-Avoidance Rules (‘SAAR’)
   
   EC Recommendation
   The EC had recommended that GAAR should not be invoked where SAAR is applicable to a particular aspect/element.
   
   GOI’s decision
   It would be pertinent to note that the GOI has stated that in cases where GAAR and SAAR both are in force, only one of them will apply to a given case and guidelines will be framed regarding applicability of GAAR or SAAR.
   
   SKP’s comment
   It can be inferred that in cases where SAAR applies, GAAR could be still be invoked based on guidelines culling out a dichotomy to the views expressed in the Final EC Report.
   
   
8. Corresponding Adjustments for same taxpayer
   
   EC Recommendation
   The EC had recommended that while determining the tax consequences of an impermissible avoidance arrangement, corresponding adjustment should be allowed in the case of the same taxpayer in the same year as well as in different years. However, no relief by way of corresponding adjustment should be allowed in the case of any other taxpayer.
   
   GOI’s decision
   The GOI has accepted the said recommendation.
   
   
9. Definition of connected person:
   
   EC Recommendation
   The EC had recommended that in order to provide greater clarity on the scope of “connected persons”, the current broad ambit of “connected persons” should be restricted to (i) associated persons as specified in the Act; and (ii) “associated enterprise” under Indian transfer pricing provisions.
   
   GOI’s decision The GOI has clarified that two separate definitions in the current provisions of the Act i.e. “Associated Person” and ”Connected Person” will be combined and there will be only one inclusive provision defining a ”Connected Person”.
   
   
10. Reporting Requirement:
    
    EC Recommendation
    The Final Report of EC had recommended that the tax audit report (issued under section 44AB of the Act) may be amended to include reporting of tax avoidance schemes above a specific threshold of tax benefit of INR 30 million or above. This is in line with the Draft EC Report.
    
    GOI’s decision
    The GOI has accepted the said recommendation.
    
    SKP’s comment
    This would levy highly onerous obligation on the tax auditor and also in cases of foreign companies, it would be difficult for the tax auditors to certify the same in view of limited access to records.
    
    
11. Relevant Factor Test
    
    EC Recommendation
    The EC in its Report had recommended that following factors should be taken into account in forming a holistic assessment to determine whether an arrangement lacks commercial substance:

• the period or time for which the arrangement (including operations therein) exists;
• the fact of payment of taxes, directly or indirectly, under the arrangement;
• the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement.
  
  However, it would be pertinent to note that these aspects would be considered as relevant but may not be sufficient to prove commercial substance.  
  
  GOI’s decision
  The GOI has accepted the said recommendation.
  
  

12. Administration of Authority for Advance Ruling (‘AAR’): 
    
    EC Recommendation
    The EC had recommended that in order to ensure speedy disposal of applications, the administration of AAR should be strengthened to ensure that that an advance ruling may be obtained within the prescribed statutory time frame of six months.
    
    GOI’s decision
    The GOI has accepted this recommendation and has stated that the AAR administration would be strengthened.
    
    
13. Constitution of Approving Panel (‘AP’)
    
    EC Recommendation
    The EC had recommended that Approving Panel should consist of 5 Members – Chariman should be a retired judge of a High Court, 2 members should be from outside of GOI and 2 members should be Chief Commissioner of Income Tax (‘CCIT’).
    
    Further, the EC had also recommended that an appropriate mechanism may be provided to ensure confidentiality of information of the taxpayer becoming available to the members outside the Government.
    
    GOI’s decision
    The GOI has decided that the 3 member panel would be headed by a High Court Judge and the other two members would comprise of a member of IRS not below the rank of CCIT and the third member would  be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practice. Further, GOI has also stated that the directions issued by the Approving Panel shall be binding on the Tax Payer as well as on the Income-tax Authorities.
    
    SKP’s comment
    No comment has been made as to whether a jurisdictional Chief Commissioner of the Tax Payer who is part of the approving panel would be replaced by another officer of same rank.
    
    
14. Other pertinent aspects:

• Tax Officer would be required to issue a show cause notice, containing reasons, to the Tax Payer before invoking the provisions of GAAR.

• Tax Payer would have an opportunity to prove that the arrangement is not an Impermissible Avoidance Agreement.

• Statutory forms to be prescribed for the Tax Officer to make reference to Commissioner, for Commissioner to make reference to Approving Panel, and for Commissioner to return the
  reference to Tax Officer.

• Time limits would be provided under the Act for action by various authorities under GAAR (ie for Commissioner, Approving Panel etc.)

SKP’s comments

The fact that several  recommendations of the EC have been accepted by the GOI is a welcome step and would bring a sigh of relief to the nervous foreign investors and business houses, etc. However, the following recommendations have not found mention in the GOI’s press release but are very important in order to ensure that the GAAR provisions are applied in right spirit:

• Commercial substance definition recommended by the EC.
• The recommendation that GAAR should not be invoked in cases where LOB clause exists in the relevant tax treaty.
• The recommendation of considering Tax Residency Certificate issued by Mauritian Government to claim Treaty Benefit (in view of circular 789 of 2000).
• The recommendation that transactions having blessings of Regulatory Authorities (ie scheme of amalgamation, mergers, etc) should be exempt from provisions of GAAR.
• Income tax on gains arising (to residents and non-residents alike) from transfer of equity shares or units of equity oriented mutual fund which    is subject to STT should be abolished, irrespective of the character of such gains, i.e. capital gains or business profits