The implementation of General Anti-Avoidance Rules (GAAR) should be deferred by three years to April 2017, the Parthasarathi Shome Committee has suggested in its final report on the controversial tax proposal.
The Committee in its final report, which was submitted to Finance Minister P Chidambaram on September 30, 2012, has suggested that GAAR provisions should not be invoked on those entities having tax residency certificate from Mauritius.
"...GAAR should be deferred for 3 years. But the year, 2016-17, should be announced now. In effect, therefore, GAAR would apply from assessment year 2017-18," Shome, who is now advisor the Finance Minister, said in his final report.
The Committee also suggested abolition of capital gains tax on transfer of securities and doing away with Securities Transaction Tax (STT).
"The Government should abolish the tax on gains arising from transfer of securities which is subject to STT, whether in the nature of capital gains or business income, to both residents as well as non-residents," the report said.
The final report of the Shome Committee, which was set up by Prime Minister Manmohan Singh in July 2012 to allay investor concerns, was made public today.
Earlier in the day, Finance Minister P Chidambaram announced deferment of GAAR by two years till April 2016, a move which sent the stock market higher by 243 points.
The Committee has recommended that GARR be applicable only if the monetary threshold of tax benefit is Rs 3 crore and more.
In view of wide-spread concerns by foreign investors, the government had earlier postponed implementation of GAAR till April 2014, which was introduced by the then Finance Minister Pranab Mukherjee in the 2012-13 Budget.
GAAR provisions were aimed at checking tax avoidance by overseas investors. The proposal, however, generated controversy, with investors expressing apprehensions that it would result in unnecessary harassment by tax authorities.
In order to address the concerns of Mauritius-based investors, the Shome panel has suggested that the provisions of the GAAR should not be invoked to "examine the genuineness of the residency of an entity set up in Mauritius".
Mauritius is the most preferred route for foreign investments on account of liberal taxation regime in the island country. India has a Double Taxation Avoidance Agreement (DTAA) with Mauritius.
India has been expressing concern over misuse of DTAA by foreign investors who route their investments from Mauritius to avoid tax liability.
Chidambaram said there has been no "real progress" on talks with Mauritius on revision of tax treaty with the