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General Anti Avoidance Rules (GAAR)

Every person wants to reduce his taxes and for this, they use many of the methods. Basically, taxes liabilities can be reduced by 3 ways; viz. Tax Planning, Tax Evasion, and Tax Avoidance. Tax Planning is to save taxes by using the various exemption and benefits etc. available under the Income tax act itself e.g. Investing in notified investment, Setting up business in SEZ etc. Tax Planning is absolutely legal and allowed under the law. Tax Evasion, in simple term, means Tax ki Chori (i.e. theft of Govt. revenue). It is simply using the unlawful means and methods e.g. claiming fake expense, claiming fake deduction etc. to reduce the tax liability. This is illegal and therefore there are various penalties and prosecutions under the Income tax act which deals with such cases. Tax Avoidance is something which falls in between the Tax Planning and Tax Evasion. It is simply reducing the tax liability using the loopholes in the law. Any planning which is done as per legal requirements in such a way which defeats the basic purpose behind that provision. Through the Tax Avoidances Govt. loses very heavy revenues each year and yet can’t punish the offenders as they plea that they haven’t committed any breach of the law. Although, there are various specific sections which are dealing with the specific type of tax avoidance e.g. Section 40A(2), Section 2(22)(e), Section 40(a)(i)/(ia) etc. But these were the only specific section which deals with only certain specific cases. But there might be many possible ways by which people can do tax avoidance and therefore to curb such kinds of general cases which has malafide intent General Anti Avoidance Rules (GAAR) were introduced. So, let’s understand it in detail: 1. What is GAAR? General Anti Avoidance Rules (GAAR) provision deals with such type of Arrangements which is entered into to obtain a tax benefit (i.e. to reduce the tax liability). GAAR is based on the principle that transactions must have to be real and the intent of arrangement/transactions must not be only Tax Avoidance. 2. When GAAR is applicable? [Sec. 95] For applicability of GAAR, all 3 things mentioned below must be present: (i). If any Arrangement or Transaction entered into by assessee is Impermissible Avoidance Arrangement (IAA) then such arrangement would be covered under the GAAR provisions. (+) (ii) Further, GAAR would be applicable where aggregate tax benefit in the relevant A.Y. arising to all parties in the arrangement is Exceeds Rs. 3 Crore. (+) (iii) The Arrangement/ Transaction must have been entered on or after 1st April 2017. (i.e. GAAR applicable from A.Y. 18-19 onward). Note- Any Arrangement/Transaction entered into before 1st April 2017 shall be taken as GRANDFATHERED (in simple terms; old/obsolete) and therefore would not be covered by GAAR. 3. What is Impermissible Avoidance Arrangement (IAA)? [Sec. 96] An Impermissible Avoidance Arrangement (IAA) means an Arrangement, the main purpose of which is to obtain Tax Benefit (i.e. to reduce tax liability) and; The Arrangement satisfied any ONE of the following conditions (called Tainted Element Presence Test): (a). It creates rights or obligations which are not generally created between persons dealing at arm’s length, OR (b). It, directly or indirectly, misuse or abuse the provisions of this Act; OR (c). It Lack/Deemed to Lack Commercial Substance in whole or part; OR (d). It is entered into/carried out by such means or in such manners which are not generally employed for bonafide purposes. When an arrangement is deemed as IAA then whatever would deem appropriate would be taken by authorities including denial of tax benefits under DTAA, lifting of the corporate veil, disregarding the location of transaction or party, deeming connected persons as one person. Note- Burden of Proof (to prove any arrangement as not IAA) would be on Assessee. 4. When any arrangement does Lack/Deemed to Lack Commercial Substance? An Arrangement would be deemed to lack commercial substance (i.e. taken as it was not commercially required) if: (i) The Substance of an arrangement as a whole is different from individual steps or a part of the arrangement (i.e. what is intended to be shown by the form of arrangement). (ii) It includes: – Round Trip Financing (i.e. Fund is routed through such locations through which tax liability is reduced) – An Accommodating Party – Elements that have the effect of offsetting or canceling each other Where the transaction involves one or more persons and the value, source, location, ownership or control of funds etc. are disguised (i.e. manipulated). (iii) Such an arrangement involves such locations of any assets/transactions/party which have been manipulated just to obtain the tax benefit (i.e. reduce the tax liability) and there is no substantial commercial purpose behind it. (iv) The Arrangement does not have significant effects upon the business risk/cash flow of any party to the arrangement. [means: Window dressing arrangements have been created just to avoid taxes]. Share It . .

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Place of Effective Management (POEM) Guidelines

Earlier, Provisions relating to the residential status of a company were providing that a company is said to be resident when the company is an Indian Company or during the previous year the Control and Management of the company was situated WHOLLY in India. Now, To avoid the taxes companies were manipulating the residential status by holding a few Board meeting outside India and saying that we are a non-resident company. This was resulting in a reduction in the tax base of Govt. Therefore, the Govt. by Finance Act, 2015 introduced the concept of Place of Effective Management (POEM) which replaced the old Control and Management Concept. But, because there was not enough clarity on the term PLACE OF EFFECTIVE MANAGEMENT the applicability of this concept was later on postponed by Finance Act, 2016 and said that this concept would apply from Assessment Year 2017-18 and onward years. Thereafter, the CBDT, later on, issued very detailed principles for determination of POEM through Circular no. 6/2017 dated 24-01-2017. And that is what called POEM guidelines or POEM rules. So, let’s understand them in detail: 1. Residential Status of Company [Section 6(3)]: As per the amended provisions of section 6 (3) of the Income Tax Act, the company qualifies as a resident of India in any previous years, if – (i) It is an Indian Company, or (ii) Its Place of Effective Management (POEM) in that year is in India. 2. Place of Effective Management (POEM): Section 6(3) also defined POEM “a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance (actually) made. But this was unclear so wait for the circular to save this. 3. Determination of POEM [Circular no 6/2017 dt. 24-01-2017]: For determination of POEM we could divide the type of companies into Two: (I) Companies Which are involved in Active Business Outside India (ABOI) (II) Companies Which are NOT involved in ABOI Now, we will discuss both the above points in detail in separate points given below. 4. Companies Which are involved in ABOI: The Company is said to be involved in Active Business Outside India (ABOI) if it fulfills ALL the 4 conditions given as follow: (i) “Passive Income” of the company is max. up to 50% of its total income; (+) (ii) Out of the Total Assets of the company; less than 50% (i.e. up to 49%) assets are situated in India, (+) (iii) Out of the Total No. of Employees of the company; less than 50% of employees are situated/resident in India; (+) (iv) Out of the Total Payroll Expenses incurred by the company; less than 50% of payroll exp. is incurred for such employee. If all the above condition is fulfilled then the company is said to be having Active Business Outside India (ABOI). Now, before heading for determining the POEM of such companies (which are having ABOI) we need to understand the terms used in the above conditions. (a). Passive Income: It means the Aggregate of following two types of incomes: – Income from the transactions, wherein, purchase and sale both are from an associated enterprise of the company, and – Income from royalty, dividend, capital gains, interest or rental income. (b). Income: means Income As Computed for Tax Purpose; or If there is No computation available for tax purposes; then Income As Per Books of Accounts. Note- Both the Above incomes (as per books/tax computation) shall be taken as per law of THAT COUNTRY WHERE THE COMPANY IS INCORPORATED. (c). Value of Assets:  In case of Individually Depreciable Assets (i.e. Single Assets System): Value shall be “Average of Opening Value & Closing Value” for tax purposes calculated at the end of the Previous Year. In the case of Block-Wise Depreciable Assets: Value shall be “Average of Opening Value & Closing Value of Block” for tax purposes calculated at the end of the Previous Year. In any other cases: Value shall be As per Books of Accounts. Note- All the Opening/Closing Balance of Assets or Books Value of Assets shall be taken as per law of THAT COUNTRY WHERE THE COMPANY IS INCORPORATED. (d). Number of Employees: It means “Average of Opening No. of Employees & Closing No. of Employees” and it would include the persons who were not directly employed by Company but perform the similar task to those of employees of the company (i.e. Outsource Employees). (e). Payroll Expense: Payroll includes the cost of salaries, wages, bonus and all other employee compensation including related pension and social cost borne by the employer. IMPORTANT NOTE- For Calculation of Any of the above said AVERAGES the data of [Current Previous Year + 2 Preceding P.Y.] shall be considered. What is the POEM of Companies which has ABOI? The POEM of the companies which has Active Business Outside India (ABOI) shall be deemed to be OUTSIDE INDIA and consequently, it would be non-resident if the majority of Board meetings are held outside India. But, if the majority of the meetings are held in India and consequently key decisions are taken in India then POEM shall fall in India. However, if through the facts and circumstances it is established that BOD is standing aside (just a puppet) and instead any Indian Holding co./ Indian Resident is exercising the powers then POEM shall be considered in India. 5. Companies Which are NOT involved in ABOI: The determination of POEM of the companies which are NOT involved in the ABOI shall depend on two stages: (i) First Stage is to Identify those PERSONS who are Actually taking key management and commercial decisions; (ii) Second Stage is to Identify the PLACE where these decisions are actually being taken from. The place where the decisions are being taken would always be of more importance rather than the place where such decisions are being implemented. Now, the PERSONS and PLACE as mentioned in the first and second stage would impact the Place of Effective Management. To determine those impact and the

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