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Saturday, July 28, 2012

Will the draft Indian GAAR guidelines discourage creative structuring?

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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