Reimagining GAAR: Could it be a tool to ensure fairer tax treatment?

In a recent ruling, the Hon’ble Ahmedabad Bench of the Tribunal upheld the denial of tax-neutral treatment to the demerger of Reckitt Benckiser’s treasury business, which resulted in dual taxation:

1) Transaction treated as a taxable transfer of capital assets by the demerged company (section 45); and
2) Shares issued by the resulting company to the shareholders of demerged company treated as deemed dividend declared by the demerged company [section 2(22)].

Without delving into the specifics of this particular case and the question whether tax authorities could have recharacterized the transaction, an interesting issue arises -

How should taxability be determined for arrangements where conditions for tax neutrality (eg., S. 47) aren’t met?

Should each step be treated and taxed separately, or should a holistic approach be taken considering the overall economic impact on all parties?

While GAAR wasn’t applicable in this particular case, had it been and if applied, the outcome could have been different.

GAAR (section 98) allows the Revenue to look beyond individual steps and assess the substance of the arrangement. If applied here, one way to look at the overall arrangement could have been, for instance, a distribution of assets to shareholders - liable only to deemed dividend taxation and thereby preventing dual taxability.

This of course is an over-simplified and hypothetical take, but it may present a different perspective: Should GAAR be seen purely as a weapon against tax avoidance or could it also help achieve reasonable tax outcomes in certain peculiar scenarios?

[Reckitt Benckiser Healthcare India Pvt. Ltd. v. DCIT: ITA 1184/Ahd/2018]

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