Further clarity on GAAR for FIIs

In a signal to foreign institutional investors, the Union Budget has made a commitment to implement General Anti Avoidance Rules (GAAR) on taxes only from April 1, 2017.

“The investment sentiment in the country has now turned positive and we need to accelerate this momentum. There are also certain contentious issues relating to GAAR which need to be resolved,” the finance minister said in his speech on Monday.

According to experts, this will bring more clarity on the government’s plan of taxing indirect transfers. GAAR aims to check tax avoidance, empowering the tax department to look into transactions deliberately structured to do this.

“The industry was hoping GAAR might be postponed again, especially in the light of slowing down of the world economy, BEPS (the global effort to harmonise tax rules) and the government’s efforts to attract huge foreign investment. However, a further deferment seems unlikely now,” said Rajesh H Gandhi, partner, Deloitte Haskins & Sells. “It is expected that resident and non-resident taxpayers will now start re-looking at their corporate structures to ensure these are GAAR-compliant before the law kicks in next year.”  

“The government needs to consider implementing some of the recommendations of the Parthasarathi Shome committee, which specifies which kind of transactions can fall under GAAR,” said Sanjay Sanghavi, tax partner, Khaitan & Co. Among other things, the panel had suggested GAAR be invoked in intra-group transactions and a monetary threshold of Rs 3 crore of tax benefit be fixed while applying the provision.

“There has to be a special provision under the income tax Act to notify that all transactions done till April 2017 will be grandfathered (meaning a rule does not apply to something that happened before it was made) and its income cannot come under GAAR,” said Sanghavi.

GAAR was first introduced by former finance minister Pranab Mukherjee as part of the Finance Act, 2012, to stop Indian companies and investors from routing investments through tax havens to avoid taxes.

It was to take effect from April 2013 but attracted large-scale protest from foreign investors and domestic business. After being deferred by two years vide the Finance Act, 2013, it was further deferred by two years up to March 2017 by the Finance Act, 2015.