GAAR Shield Limited; IT Dept Can Probe Arrangements
The Income Tax authorities may still deny tax treaty benefits to offshore private equity (PE) and venture capital (VC) firms if it's found that any transaction made in India was done solely to avail tax benefits, a senior government official told Moneycontrol.
The recent amendments to the Income Tax rules (applicable from March 31), which grandfathered pre-2017 "investments" from retrospective scrutiny of the General Anti-Avoidance Rule (GAAR), still allow authorities to inspect "arrangements" and test them according to anti-abuse provisions.
GAAR is a regulatory framework that allows tax authorities to deny tax benefits (that is, impose additional tax on capital gains) for "impermissible avoidance arrangements." It targets complex structures created by foreign firms (that is, private equity, venture capital, etc.) primarily for tax-savings purposes rather than for commercial substance.
The rules empower officials to ensure foreign entities pay their fair share of taxes for income earned on their investments in India.
"The March 31 amendments were brought in to provide confidence to investors that their erstwhile transactions won’t be questioned, but if the arrangement is found to be built solely for availing tax benefits, the transaction may be challenged," the official said.
What is an arrangement?
Under Indian tax law, the term ‘arrangement’ is broadly defined. It includes any step or part of a transaction, scheme, agreement or understanding. While ‘investment’ is not separately defined, it would typically fall within this ambit.
For example, routing an investment into India through a Mauritius SPV to obtain India-Mauritius treaty benefits would constitute an ‘arrangement’ for GAAR purposes. The investment itself is one component of that wider arrangement.
