The controversial GAAR provision, which seeks to check tax evasion by investors routing their funds through tax havens, will come into effect from April 1, 2016, a government notification said.
The provision of General Anti Avoidance Rules (GAAR) will apply to entities availing tax benefit of at least Rs 3 crore, according to the notification dated September 23.
It will apply to foreign institutional investors (FIIs) that have claimed benefits under any Double Tax Avoidance Agreement (DTAA).
Investments made by a non-resident by way of offshore derivative instruments or P-Notes through FIIs, will not be covered by the GAAR provisions.
Investments made before August 30, 2010, will not be scrutinised under GAAR, it said, adding the provisions will apply to assessees that obtain tax benefits on or after April 1, 2015.
"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. Investment in Participatory Notes will not be subject to GAAR," Deloitte Haskins & Sells Partner N C Hegde said.
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 getting apprehensive about harassment by tax authorities.
To soothe the nerves of jittery investors, Finance Minister P Chidambaram in January announced the postponement of the implementation of Chapter X-A of the I-T Act (dealing with GAAR) by two years to April 1, 2016.
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.
"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.
The assessing officer has 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.'
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 tax avoidance was not the intent.
The notification is broadly in line with recommendations of the Parthasarathi Shome Committee, which was set up by Prime Minister Manmohan Singh in July last year to address the concerns of investors.
"From the notification, it is apparent that many recommendations of the Shome Committee have been accepted. However, the benefit of grandfathering has been limited - firstly, to investments made before August 1, 2010, and secondly, only for benefit up to March 31, 2015," said Rahul Garg, Direct Tax Leader at PwC India.