Earlier this year, the Indian Revenue Department released
its position paper on implementing the much awaited anti tax avoidance rules,
expectedly on pro revenue lines. What was of interest in the paper (http://finmin.nic.in/the_ministry/dept_revenue/Draft_GAAR_GuidelineITAct1961.pdf)
besides the illustrations, was the criteria for defining impermissible avoidance
arrangement as one whose
(a) its main purpose is to obtain a „tax benefit‟, and,
(b) it also has one of the following characteristics:
(i) it creates rights and obligations, which are not normally created between parties dealing
at arm‟s length; (ii) it results in misuse or abuse of the provisions of the
tax law; (iii) it lacks commercial substance; (iv) it is carried out by means or in a manner which is normally not employed
for an authentic (bona fide) purpose.
It is point b(iv) that bears interest here. Structuring of
transactions(for my earlier posts on structuring read these posts ), needs ample creativity, customization
and is often only constrained by the regulations/tax laws which it aims to
circumvent. Such an explicit provision will give the Revenue leverage to attack
innovative structures, and therefore defeat the first mover advantage of the
early adopters. Of course, this may only ensure legal wars over the meaning of ‘normally
not employed’ and so on, but this puts innovative structures at risk. Hence, till more clarity on this point,
those structuring transactions for Indian clients would be well advised to
exercise caution.
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