MUMBAI: The Indian tax landscape changed significantly for multinationals in 2017 with the adoption of new laws incorporating the OECD/G20 base erosion profit shifting (BEPS) plan agenda and the government’s issuance of a series of circulars on controversial topics such as the general anti-avoidance rule (GAAR) and Indian tax residence.
The Indian courts also made their mark in 2017, particularly in the area of when a foreign firm has a permanent establishment (PE) in India.
hese provisions, originally introduced in the Income Tax Act, 1961 (ITA) by the Finance Act, 2012, confer unprecedented broad powers to the tax authorities to deny tax benefits, including tax benefits applicable under tax treaties, if the tax benefits arise from arrangements that are ‘impermissible avoidance arrangements.’
India’s Central Board of Direct Taxes (CBDT) on January 27, 2017, released a circular clarifying the GAAR after considering the submissions of a working group which took into account public comments. Through the GAAR circular, the CBDT expressed its view that GAAR provisions may still be invoked in cases which there exist special anti-avoidance rules (SAARs) or where arrangements are covered under India’s double taxation avoidance agreement with a limitation on benefits (LOB) clause. The CBDT said special anti-avoidance rules and LOB provisions are inadequate to address all situations of tax abuse. Further, the CBDT declined requests to clarify that GAAR provisions should not apply in case of long standing structures.
Also, in a disappointing move, the CBDT has stopped short of fully exempting court-sanctioned mergers/ demergers from the ambit of GAAR by adding a caveat that only where the tax implications of such an arrangement have been “explicitly and adequately” considered by the courts will GAAR not be applicable. Use of such ambiguous language does not dispel the uncertainty faced by taxpayers.
