In what will be extremely welcome news for foreign investors, the dreaded general anti-avoidance rules (GAAR) are likely to be notified only from 1 April, 2013, said a Bloomberg UTV report today, quoting finance ministry officials. In addition, GAAR will not apply retrospectively.
The report said the step is being taken to help foreign institutional investors to adjust to the new tax regime.
Foreign investors had complained loudly about GAAR, which required companies and other entities to prove that they had not undertaken transactions to avoid tax. The onus of proof was placed on the company or investor under scrutiny, unlike in other parts of the world where the burden of proof lies with tax authorities.
Foreign investors were also worried that GAAR would override India’s tax treaty with Mauritius which exempts capital gains from being doubly taxed. Most foreign funds invest in Indian stocks and bonds through Mauritius.
The report said the government would issue an extensive ‘frequently asked questions’ list that will be part of GAAR rules. This list would contain clear definitions of ‘permissible arrangements’ with examples.
The onus of proof to prove that a transaction was done to avoid tax will lie on the tax authorities, the report said. There will also be a three-stage process to invoke GAAR.
The panel assessing a GAAR claim will consist of independent experts and tax officials, said the Bloomberg UTV report.
No official comment was available from the finance ministry.