The Finance Ministry has notified the much awaited the General Anti-avoidance rules (GAAR) that are intended to check tax avoidance without ruffling the feathers of the foreign investors.
The rules, which will come into force from April 1, 2016, are in keeping with the assurance given by the Finance Minister P. Chidambaram in January.
Non-resident investors in Foreign institutional investors (FII) have been kept out of GAAR.
This is irrespective of whether their investment in FIIs is done through offshore derivative instruments (like participatory notes) or otherwise.
Also, the GAAR rules will not apply to FIIs that choose not to take any treaty benefits under the income tax law.
The investments made before August 30, 2010 – the date of introduction of Direct Taxes Code Bill 2010 – has been grandfathered.
Simply put, the GAAR rules will not apply on any income accruing or arising to a person from transfer of investments made before August 30, 2010 by such person.
GAAR provisions will be attracted only in cases where the tax benefit in the arrangement is more than Rs 3 crore, the rules notified today said.
Also, where a part of the arrangement is an impermissible avoidance arrangement, GAAR will be restricted to the tax consequence of that part which is impermissible and not to the whole part.
It is only arrangements whose main purpose is to obtain a tax benefit that will be considered as an impermissible avoidance arrangement.
Before invoking GAAR, the assessing officer has to issue a show cause notice to the assessee.
The assessee will have an opportunity to prove that the arrangement is not an impermissible avoidance arrangement.
The GAAR rules notified today prescribe statutory forms for the purpose of making reference for initiating GAAR proceedings.
“The notification of forms is a step in the right direction as the same would ensure no subjectivity and bias, if properly filed in and detailed out by the tax officials.
What is important is judicious implementation of GAAR provisions. Such notification of forms if adhered to in true spirit will assist in gaining much needed confidence of the business community", said Aseem Chawla, Partner, MPC Legal, a law firm.
N.C. Hegde, Partner, Deloitte, Haskins & Sells, said that stock markets will have a lot to cheer as FIIs which do not seek to avail themselves of treaty benefits will not be subjected to GAAR. Similarly investment in Participatory notes will not be subject to GAAR.
Though there seems to be an intention to grandfather investments made before August 31, 2010, the exemption is not very happily worded, Hegde said.
Further the exemption will not apply once GAAR is effective from April 1, 2015 thus negating that exemption significantly, he added.