The revenue department has initiated the search beneath anti-tax avoidance law, General Anti-avoidance Rule (GAAR), for companies and entities who uses bogus methods to prevent furnishing the taxes.
A Hyderabad-based firm, Ekge retail has obtained a notice where the department has applied section 96(1)(d) of the Income-tax Act, which is concerned with prohibited agreements undertaken to evade taxation.
The company has now approached the high court for the state of Telangana at Hyderabad opposing the relevancy of the section for some transactions executed by the same in 2018 and 2019. The notice was given to the company in Feb 2022.
GAAR initially began in 2012, but it was recognized as controversial and there was a demand that the government put effective checks and balances.
The government has now mentioned a process where GAAR notices would be given. The same was decided that prior to providing the notice, a tax officer should take the case to the tax commissioner. When the commissioner is convinced, then it shall be forwarded to a panel, which would be needed to furnish its approval prior to taking any action.
The investigation comes months post to the government set up a panel to see these cases in January this year.
“This subsection on one hand questions the manner of entering into a transaction by the taxpayer, while the circular issued by CBDT in 2017 clarifies that GAAR will not interplay with the right of the taxpayer per se on the manner of implementing a transaction,” mentioned by a tax expert and regulatory consultants Asire Consulting. “Considering that the reach of GAAR is not just cross-border transactions but any domestic arrangement as well, the government could come up with detailed guidelines to avoid litigation.”
GAAR framework was put in suspension for some time, might be it is because of the pandemic and the new investigations mean various M&As or corporate transactions can now be questioned when they are precisely made as a segment of tax planning.
Tax experts mentioned that GAAR has existed in its present form in the law since 2017-18, but its execution begins this year post to the constitution of the panel.
GAAR shall get effective when the tax department learns that some transactions or structures in or outside of India were set up or accomplished to prevent the paying of income tax.
Any decisions by the firm to set up an office in another country or execution of a merger or acquisition as a portion of the tax planning can draw GAAR.
