GAAR put off by two years to woo foreign investors

Jan 15 2013, 01:02 IST
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Summary* Market cheers move; Sensex jumps 243 points to two-year high

Foreign investments into the Indian stock markets got a long term measure of certainty on their tax treatment. On Monday, finance minister P Chidambaram clarified that the controversial amendment on tax avoidance norms has been deferred by two years. The general anti-avoidance rules (GAAR), which created a lot of uncertainty among foreign investors, will now be implemented from April 1, 2016.

Before leaving for Singapore to promote India as an attractive investment destination, the minister brought in a wide range of steps to undo the damage created by Budget 2012-13 that had led to flight of investment from the stock markets.

The changes announced by Chidambaram broadly follow the Parthasarathi Shome committee recommendations. The committee was set up by Prime Minister Manmohan Singh as FIIs voiced their concerns on the tax laws.

The minister said, “GAAR will be applied only in cases of tax avoidance. We have tried to strike a balance between investment concerns and revenue interests of the government.”

The seventeen measures announced by the finance minister says the anti-avoidance rules will kick in only where the tax department is convinced that avoiding taxes was the main reason for coming through a tax haven or an arrangement. The current provision is that the rules will operate even if tax avoidance is only one of the main provisions.

FIIs and participatory notes which do not apply for benefits under a double taxation avoidance agreements (DTAA) that India has with Mauritius will not come under GAAR. While the Shome committee had said even for the Mauritius route the treaty provisions should over ride, the statement by the finance minister was silent on it. To make the adjudication of tax demands more acceptable to investors an independent approving panel comprising a high court judge as chairperson, one chief commissioner of income tax and a scholar with speciality in direct taxes will decide if a GAAR demand can be raised by the tax department. Their decisions will however be binding on both assessees and the I-T department.

“It is a very positive message to investors. Almost all recommendations of Shome committee have been accepted and having an independent approving panel, deferring it by two years are big steps for investors,” Dinesh Kanabar, deputy CEO, KPMG, told The Indian Express.

The Sensex at the BSE closed 1.23 per cent (243 points) higher on the assurance that the government has tried to allay fears of investors

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