Curbing aggressive tax avoidance strategies : Clause 182 of the Income Tax Bill, 2025 Vs. Section 99 of the Income-tax Act, 1961

Clause 182 Treatment of connected person and accommodating party.

Income Tax Bill, 2025

Introduction

The General Anti-Avoidance Rule (GAAR) represents a significant legislative measure aimed at curbing aggressive tax avoidance strategies that, while technically legal, undermine the intent of tax statutes. Both Clause 182 of the Income Tax Bill, 2025, and Section 99 of the Income-tax Act, 1961, play a pivotal role within the GAAR framework by addressing the treatment of connected persons and accommodating parties when determining the existence of a tax benefit. These provisions empower tax authorities to disregard artificial arrangements and pierce through complex structures designed for tax avoidance. This commentary provides a detailed analysis of Clause 182, explores its legislative intent, practical implications, and compares it with the existing Section 99, highlighting their similarities, differences, and the broader impact on tax administration and compliance.

Objective and Purpose

The core objective of both Clause 182 and Section 99 is to provide statutory tools for the tax authorities to counteract tax avoidance arrangements involving connected persons and accommodating parties. The legislative intent is to ensure that the substance of a transaction prevails over its form, thereby upholding the integrity of the tax system. These provisions are rooted in the principle that tax liability should be determined based on the real intention and economic substance of an arrangement, rather than its mere legal form or the artificial interposition of entities.

Historically, tax avoidance has posed a challenge to tax administrations worldwide. The introduction of GAAR provisions in India, first through the Finance Act, 2013 (effective from April 1, 2016), was a response to increasing sophistication in tax planning and the need for a robust anti-avoidance framework. The reiteration of these principles in Clause 182 of the Income Tax Bill, 2025, underscores the continued relevance and necessity of such measures in the evolving tax landscape.

Detailed Analysis of Clause 182 of the Income Tax Bill, 2025

a) Treatment of Connected Persons as One and the Same Person

This provision empowers tax authorities to treat connected persons as a single entity for the purpose of determining whether a tax benefit exists. The rationale is to prevent taxpayers from fragmenting transactions among related parties to achieve tax advantages that would not be available if the parties were treated as one.

The term "connected persons" typically refers to individuals or entities with close financial, familial, or business relationships. This includes, but is not limited to, subsidiaries, holding companies, affiliates, and family members. By aggregating the actions of connected persons, the provision seeks to prevent collusive arrangements that exploit the separateness of legal entities for tax benefit.

For instance, if Company A and its wholly-owned subsidiary Company B enter into a series of transactions designed to shift profits and reduce tax liability, the tax authorities may disregard the separate legal identities and treat them as a single taxpayer. This approach aligns with the economic substance doctrine, which looks beyond the legal form to the actual substance of the transaction.

b) Disregarding Accommodating Parties

An "accommodating party" is an individual or entity that participates in a transaction primarily to facilitate a tax benefit for another party, without having a genuine commercial interest in the arrangement. Clause 182(b) authorizes the tax authorities to disregard such parties when evaluating tax benefits.

This provision targets sham transactions where an accommodating party is inserted solely to create a facade of legitimacy or to exploit loopholes. By disregarding such parties, the authorities can neutralize arrangements that lack commercial substance and are orchestrated solely for tax avoidance.

For example, if Company X routes a transaction through Company Y (an accommodating party with no real stake in the deal) to claim a tax deduction or exemption, the authorities may ignore Company Y's involvement and attribute the transaction directly to Company X.

c) Treating Accommodating and Other Parties as One and the Same Person

Clause 182(c) provides for the possibility of treating an accommodating party and another party as a single person. This is particularly relevant in cases where the accommodating party is used as a conduit or alter ego of another party, and the separation is merely a legal fiction.

The provision ensures that tax benefits cannot be obtained by artificially splitting a transaction between multiple parties who, in substance, act as one. This is an extension of the "substance over form" principle and is crucial in addressing complex multi-party arrangements often seen in tax avoidance schemes.

An illustration would be a scenario where an individual uses a shell company (accommodating party) to receive income and then channels it back to themselves. The authorities, applying this provision, may treat both the individual and the shell company as the same person, thereby denying any tax advantage arising from the separation.

d) Disregarding Corporate Structures

Clause 182(d) empowers tax authorities to "look through" or disregard corporate structures when assessing the existence of a tax benefit. This is perhaps the most far-reaching aspect, as it allows authorities to pierce the corporate veil and examine the true nature of arrangements.

The provision is aimed at preventing the misuse of corporate entities to shield transactions from tax or to create artificial layers that obscure the real nature of the arrangement. It is particularly relevant in cross-border transactions, holding structures, and cases involving multiple layers of entities.

For example, if a taxpayer sets up a series of offshore companies to route investments and avoid taxes in India, the authorities may disregard the intervening corporate entities and tax the arrangement based on its real substance.

Practical Implications

The practical implications of Clause 182 are significant for taxpayers, businesses, and tax authorities alike.

• For Taxpayers and Businesses: There is an increased risk of scrutiny for transactions involving related parties or complex structures. Taxpayers must ensure that their arrangements have genuine commercial substance and are not designed solely for tax benefits. Documentation and rationale for each transaction must be robust to withstand GAAR scrutiny.
• For Tax Authorities: The provision enhances the powers of tax authorities to challenge and recharacterize arrangements that are abusive or lack substance. However, the exercise of such powers must be balanced against the need for certainty and predictability in tax law. Authorities must provide reasoned orders and follow due process to avoid arbitrary application.
• For Advisors and Intermediaries: Legal and tax advisors must carefully evaluate the risk of GAAR application when structuring transactions, particularly those involving connected persons or accommodating parties. The emphasis should be on commercial substance and alignment with the legislative intent.

Procedurally, the invocation of GAAR, including Clause 182, typically involves a multi-layered approval process to prevent misuse. Taxpayers are given an opportunity to present their case, and decisions are subject to review by higher authorities or panels.

Comparative Analysis with Section 99 of the Income-tax Act, 1961

Section 99 of the Income-tax Act, 1961, inserted by the Finance Act, 2013 (effective from April 1, 2016), is virtually identical in language and scope to Clause 182 of the Income Tax Bill, 2025. The provisions are as follows:

1. The parties who are connected persons in relation to each other may be treated as one and the same person;
2. Any accommodating party may be disregarded;
3. The accommodating party and any other party may be treated as one and the same person;
4. The arrangement may be considered or looked through by disregarding any corporate structure.

A side-by-side comparison reveals that Clause 182 is a direct reiteration of Section 99, with only minor differences in formatting (alphabetical vs. Roman numeral listing) and no substantive change in language or intent. The continuity reflects the legislature's satisfaction with the effectiveness and sufficiency of the existing provision and its desire to maintain the same anti-avoidance principles in the new legislative regime.

Key Similarities

• Identical Scope and Language: Both provisions empower authorities to treat connected persons as one, disregard accommodating parties, treat accommodating and other parties as one, and look through corporate structures.
• Legislative Intent: Both are intended to prevent tax avoidance through artificial arrangements and to ensure that the substance of transactions prevails over their form.
• Application within GAAR Framework: Both form an integral part of the broader GAAR provisions, providing specific mechanisms to address abusive arrangements.

Key Differences

• Contextual Placement: Clause 182 is part of the proposed Income Tax Bill, 2025, which is intended to replace the Income-tax Act, 1961. Section 99 is part of the existing statute.
• Drafting Style: The only minor difference is the use of letters (a)-(d) in Clause 182 versus Roman numerals (i)-(iv) in Section 99. This is a stylistic change with no legal effect.
• Legislative Evolution: The reiteration of Section 99's language in Clause 182 suggests that the legislature is not proposing a substantive shift in the anti-avoidance regime, but rather seeking continuity as part of a broader overhaul of the tax code.

Comparative Perspective: International and Domestic

The approach adopted in Clause 182 and Section 99 is consistent with international best practices in anti-avoidance legislation. Jurisdictions such as the United Kingdom (UK GAAR), Australia (Part IVA of the Income Tax Assessment Act), and Canada (General Anti-Avoidance Rule) have similar provisions allowing authorities to disregard artificial arrangements and connected entities.

Within India, these provisions complement other anti-avoidance measures, such as the provisions on transfer pricing, thin capitalization, and the Specific Anti-Avoidance Rules (SAAR), creating a comprehensive framework to tackle tax avoidance.

Ambiguities and Issues in Interpretation

While the provisions are broadly worded to provide flexibility, they also raise certain interpretational challenges:

• Definition of Connected Persons: The term is not defined in Clause 182 or Section 99 itself, and reference must be made to definitions elsewhere in the Act or related rules. The breadth of the definition can lead to disputes over who qualifies as a connected person.
• Accommodating Party: The identification of an accommodating party is inherently subjective and may be contested by taxpayers who assert commercial justification for the party's involvement.
• Commercial Substance: Determining whether an arrangement lacks commercial substance is fact-specific and open to varying interpretations, potentially leading to litigation.
• Scope of "Look Through": The authority to disregard corporate structures must be exercised judiciously to avoid penalizing legitimate business arrangements.

Judicial interpretation and administrative guidance will be crucial in ensuring consistent and fair application of these provisions.

Practical Compliance and Procedural Safeguards

Given the breadth of the powers conferred by these provisions, procedural safeguards are essential to prevent arbitrary or excessive application. The Indian GAAR regime incorporates such safeguards, including:

• Requirement for approval by a high-level panel before invoking GAAR;
• Opportunity for the taxpayer to present their case and provide evidence of commercial substance;
• Right to appeal and seek judicial review of adverse determinations.

Taxpayers should maintain comprehensive documentation to substantiate the commercial rationale for their arrangements and be prepared for potential scrutiny under GAAR.

Impact on Stakeholders

• Businesses: Increased focus on substance in structuring transactions. Need for robust transfer pricing and related party documentation.
• Multinational Enterprises: Greater risk of challenge for cross-border arrangements involving group entities, holding companies, or special purpose vehicles.
• Tax Advisors: Heightened responsibility to advise clients on GAAR risks and to structure arrangements with clear commercial justification.
• Tax Administration: Enhanced ability to combat tax avoidance, but also increased responsibility to ensure fair and consistent application.

Areas for Reform or Judicial Clarification

While the provisions are robust, certain areas may benefit from further clarification:

• Clearer statutory definitions of "connected person" and "accommodating party";
• Guidance on the application of the "look through" principle, particularly in cross-border contexts;
• Procedural clarity on the invocation of GAAR and taxpayer rights;
• Judicial precedents to provide interpretational certainty and balance the interests of revenue and taxpayers.

Conclusion

Clause 182 of the Income Tax Bill, 2025, and Section 99 of the Income-tax Act, 1961, are central to the effective implementation of India's GAAR regime. By empowering tax authorities to disregard artificial arrangements involving connected persons and accommodating parties, these provisions seek to uphold the integrity of the tax system and ensure that tax liability is determined by the true substance of transactions. The near-identical language of the two provisions reflects a legislative intent to maintain continuity in anti-avoidance measures. However, the broad powers conferred must be exercised with procedural safeguards and guided by judicial interpretation to prevent overreach and ensure fairness. As tax planning continues to evolve, these provisions will remain at the forefront of the battle against aggressive tax avoidance in India.

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Full Text:

Clause 182 Treatment of connected person and accommodating party.

 

Dated: 28-4-2025