Infrastructure projects in India are often structured through complex holding structures involving multiple layers of entities, special purpose vehicles (SPVs), and special purpose companies (SPCs). These structures, while commercially necessary for project development and financing, present significant General Anti-Avoidance Rule (GAAR) risks under the Direct Tax Code (DTC) 2025. This guide analyses the GAAR risks in infrastructure holding structures and provides a checklist for auditors.
The GAAR Framework
Section 178 — Applicability of GAAR
Section 178(1) provides that "an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement". Section 178(2) clarifies that GAAR "may be applied to any step in, or a part of, the arrangement".
Section 179 — The Impermissible Avoidance Arrangement Test
An arrangement qualifies as an impermissible avoidance arrangement where the main purpose is to obtain a tax benefit, and it:
- Creates rights or obligations not ordinarily created between persons dealing at arm's length
- Results in misuse or abuse of the provisions of the Act
- Lacks commercial substance or is deemed to lack commercial substance under Section 180
- Is entered into by means not ordinarily employed for bona fide purposes
Section 179(2) — The Presumption
Section 179(2) creates a presumption that an arrangement has been entered into for the main purpose of obtaining a tax benefit if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit.
GAAR Risks in Infrastructure Holding Structures
1. Complex Layering
Multiple layers of holding entities with no clear commercial rationale beyond tax optimisation may trigger GAAR scrutiny. Infrastructure structures often involve:
- Holding companies in multiple jurisdictions
- Special purpose vehicles (SPVs) for each project
- Intermediate holding entities
- These layers must have genuine commercial substance.
2. Financing Structures
Infrastructure projects are highly leveraged. Financing structures may raise GAAR concerns if:
- Debt is routed through tax-advantaged jurisdictions
- Interest rates are not at arm's length
- Guarantee arrangements lack commercial substance
3. Tax Treaty Abuse
Infrastructure holding structures may involve treaty benefits:
- Reduced withholding tax on interest and dividends
- Exemption from capital gains tax
- These benefits may be challenged if the structure lacks substance
4. Round Trip Financing
Structures involving funds flowing out of India and back through related entities may be challenged as round trip financing.
5. Accommodating Parties
Entities that serve no commercial purpose other than obtaining a tax benefit may be considered accommodating parties.
What Auditors Should Flag
1. Commercial Rationale
- Flag: Holding structures without documented commercial rationale
- Action: Require documentation of the commercial rationale for each entity
- Risk: If no commercial rationale exists, the structure may be viewed as tax avoidance
2. Substance in Holding Entities
- Flag: Holding entities with no physical presence or economic activity
- Action: Review the substance of each holding entity
- Risk: Lack of substance is a key indicator of an impermissible avoidance arrangement
3. Arm's Length Pricing
- Flag: Related-party transactions not at arm's length
- Action: Review transfer pricing documentation
- Risk: Non-arm's length pricing may indicate tax avoidance
4. Financing Arrangements
- Flag: Debt-to-equity ratios that are not commercially justifiable
- Action: Review financing arrangements
- Risk: Excessive debt may be used to shift profits
5. Treaty Shopping
- Flag: Entities located in jurisdictions solely for treaty benefits
- Action: Review the choice of jurisdiction for each entity
- Risk: Treaty shopping is specifically targeted by GAAR
6. Round Trip Financing
- Flag: Circular flows of funds
- Action: Review the flow of funds
- Risk: Round trip financing is a specific indicator of lack of commercial substance
7. Tax Benefit as Main Purpose
- Flag: Structures where the main purpose appears to be tax benefit
- Action: Analyse the dominant purpose of the structure
- Risk: If the main purpose is tax benefit, the structure may be subject to GAAR
The Commercial Substance Test
Section 180 — Lack of Commercial Substance
Section 180(1) deems an arrangement to lack commercial substance if:
- The substance or effect of the arrangement as a whole is inconsistent with the form of its individual steps
- It involves round trip financing, accommodating parties, offsetting elements, or disguised transactions
- It involves the location of an asset, transaction, or place of residence without substantial commercial purpose
- It does not have a significant effect upon business risks or net cash flows apart from the tax benefit
Auditors' Documentation Checklist
1. Commercial Rationale Documentation
- Documented commercial rationale for each entity
- Documented commercial rationale for each transaction
- Evidence of business purpose
2. Substance Documentation
- Physical presence (office, employees)
- Decision-making in the jurisdiction
- Board minutes and resolutions
- Regulatory compliance
3. Transfer Pricing Documentation
- Transfer pricing study
- Functional analysis
- Benchmarking analysis
- Arm's length price determination
4. Financing Documentation
- Loan agreements
- Guarantee agreements
- Interest rate benchmarking
- Debt-to-equity analysis
Consequences of GAAR Invocation
Section 181 — Consequences
If an infrastructure holding structure is declared to be an impermissible avoidance arrangement, Section 181 empowers the tax authorities to:
- Disregard, combine, or recharacterise any step in the arrangement
- Treat the arrangement as if it had not been entered into or carried out
- Disregard any accommodating party
- Reallocate income, expenditure, deduction, relief, or rebate among parties
Practical Implications
- Recharacterisation of income
- Disallowance of deductions
- Reallocation of income to India
- Denial of treaty benefits
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on GAAR compliance for infrastructure holding structures. Our direct tax experts help infrastructure developers and operators evaluate structures for GAAR risk, document commercial rationale, and navigate the regulatory framework. We assist in structure review, documentation, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on GAAR compliance or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex GAAR framework for infrastructure holding structures requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- Structure Review: GAAR risk assessment for infrastructure holding structures
- Documentation: Assistance with commercial rationale documentation
- Substance: Guidance on ensuring substance in holding entities
- Representation: Representation before income-tax authorities
Contact us for expert legal guidance on your infrastructure structuring matters.