General Anti-Avoidance Rules to interfere investing in India

By H. P. Ranina

Published: Mon 25 Jun 2012, 4:36 PM

Last updated: Tue 7 Apr 2015, 12:00 PM

There is a lot of concern expressed by non-residents, including foreign investors, that the General Anti-Avoidance Rules introduced in the last budget will prevent foreigners from investing in India. Is there any substance in this fear?

R S Fernandes, Dubai

The Finance Act, 2012 has introduced a new Chapter X-A which covers sections 95 to 102 of the Income-tax Act, 1961. The anti-avoidance rule applies to an arrangement entered into by a tax payer which is declared to be an impermissible avoidance arrangement. Such an arrangement is defined to mean one which is having as its main purpose the object of obtaining a tax benefit.

Generally, such an arrangement would be one which results in the misuse or abuse of the provisions of the Act. It also covers an arrangement which lacks commercial substance as defined in section 97 of the Act. An impermissible avoidance arrangement may be one which creates rights or obligations that are not ordinarily created between persons who are independent and who deal at arm’s length. It is important to note that this provision will become applicable only in the next financial year 2013-14, relevant to the assessment year 2014-15. The onus of proof of an impermissible arrangement has been cast on the tax department.

The writer is a practising lawyer, specialising in tax and exchange management laws of India

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