A Hyderabad-based company, Ekge Retail, has received a notice in which the department has applied Section 96(1)(d) of the Income-tax Act, which deals with impermissible agreements undertaken to avoid taxation.
The company has now approached the high court for state of Telangana at Hyderabad challenging the applicability of the section for some transactions undertaken by it in 2018 and 2019. The notice was issued to the company in February 2022.
GAAR was first introduced in 2012, but it was considered controversial and there was a demand that the government put in proper checks and balances.
The government has now specified a procedure in which GAAR notices can be issued. It was decided that before issuing a notice, a tax officer must escalate the matter to a tax commissioner. If the commissioner is convinced, then it will be forwarded to a panel, which will have to give its approval before any action is taken.
The investigations come months after the government set up a panel to take a look at 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,” said Rahul Garg, managing partner of tax 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.”
The GAAR framework was put in abeyance for a while, presumably due to the pandemic, and the fresh investigations mean several M&As or corporate transactions could now be questioned if they are specifically designed as part of tax planning.
Tax experts point out that GAAR has existed in its current form in the regulations since 2017-18, but its effective implementation started this year only after the constitution of the panel.
The main objective of this panel is to ensure that it is invoked fairly and to avoid subjectivity at the level of officers to pick up cases, say experts.
GAAR would go into effect if the tax department thinks that some transactions or structures in or outside of India were set up or done just to avoid paying income tax.
Any decision by a company to set up an office in another country or undertake a merger or acquisition merely as part of tax planning could attract GAAR.