Inbound investment into India
Assessing the impact of GAAR and the MLI
Vishal Gada, Zeel Jambuwala and Jay Shah of Aurtus Consulting consider the key provisions that investors should take into account when planning an inbound investment structure or reviewing an existing structure in India.
As of 2021, India continues to be one of the most popular international investment jurisdictions. While global foreign direct investment (FDI) activity fell by 42% in 2020 due to the challenges posed by the COVID-19 pandemic, India registered a healthy 13% growth in its FDI inflows.
The enactment of general anti-avoidance rules (GAAR) under the domestic tax law of India and the modification of tax treaties on account of the multilateral instrument (MLI) have had a significant bearing on inbound investments into India. This article discusses key considerations under GAAR and MLI that should be taken into account while planning a new inbound investment structure or reviewing an existing structure.
Inbound investments: GAAR considerations
The introduction of GAAR with effect from April 1 2017 has resulted in codification of anti-avoidance principles under the domestic tax law. The provisions of GAAR would trigger when an arrangement is regarded as an impermissible avoidance arrangement (IAA).
An arrangement is regarded as an IAA where both primary test and secondary test are satisfied. The primary test is said to be met when the ‘main purpose’ of the arrangement is to obtain a tax benefit. The secondary test is considered to be satisfied for an arrangement if any of the following conditions are met:
It is not at arm’s-length;
It results in misuse or abuse of the provisions;
It lacks commercial substance;
It is entered in a manner not employed for bona fide purposes.
