GAAR will apply to FIIs who currently benefit from tax treaties

New Delhi: The government has notified the controversial anti-avoidance tax rules, which will be implemented from April 2016 and apply to business arrangements with a tax benefit exceeding Rs 3 crore.

The General Anti Avoidance Rules (GAAR) provisions will come into force from April 1, 2016, the Central Board of Direct Taxes (CBDT) said in a notification dated September 23.

Only FIIs that have not taken the benefit of any tax treaty entered into by India and who have invested in listed or unlisted securities with the prior permission of the relevant authorities - Sebi or other regulatory guidelines - shall not be covered by GAAR.

The GAAR provisions were introduced in the 2012-13 Budget by then Finance Minister Pranab Mukherjee to check tax avoidance and were to have come into effect from April 1, 2014. The proposal generated controversy, with investors apprehensive about harassment by tax authorities.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

[caption id=“attachment_1135959” align=“alignright” width=“380”]  Reuters[/caption]

To soothe the nerves of jittery investors, Finance Minister P Chidambaram in January announced the postponement of the implementation of Chapter 10A of the Income-Tax Act (dealing with GAAR) by two years to April 1, 2016.

According to the notification, GAAR would be applicable to foreign institutional investors that have not taken the benefit of an agreement under Section 90 or Section 90A of the I-T Act or Double Taxation Avoidance Agreement (DTAA).

The GAAR provisions would not apply to business arrangements where the “tax benefit in the relevant assessment year arising, in aggregate, to all parties to the arrangement does not exceed a sum of Rs 3 crore.”

“Where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax shall be determined with reference to such part only,” the notification said.

Besides, before invoking the GAAR provisions, the assessing officer has to “issue a notice in writing to the assessee seeking objections, if any, to the applicability of provisions of Chapter X-A.”

The notification said investments made by a non-resident through foreign institutional investors (FIIs) would not be covered by the GAAR provisions.

“Stock markets will have a lot to cheer as FIIs which do not seek to avail of treaty benefits will not be subjected to GAAR. Similarly, investment in participatory notes will not be subject to GAAR,” Deloitte Haskins & Sells Partner N C Hegde said.

Investments made before August 30, 2010, would be spared from the GAAR net, according to the notification.

Under the modified norms, a tax official needs to issue a show-cause notice, with reasons, to invoke GAAR provisions and also has to give an opportunity to an assessee to explain whether an arrangement was ‘impermissible.’

A business arrangement can be termed ‘impermissible’ if its main purpose is to obtain tax benefit. Under the original GAAR proposals, the anti-tax avoidance provisions could be invoked “if one of the purposes” was to obtain tax benefit.

While deferring the GAAR provisions in January, Chidambaram had said: “No investor should now have any

apprehension about his investments in India. Only those arrangements, which have been made for the purpose of tax avoidance, will be brought under GAAR.”

He had said he has effectively “buried the ghost that GAAR will be some kind of a monster.”

The government’s decision to amend the provisions was in response to fears by investors that the tax department, armed with discretionary powers, would crack the whip even in cases where the intent was not tax evasion.

PTI