New Delhi: In a bid to bring clarity in tax rules for foreign entities in India and their transactions, the government on Friday said the General Anti-Avoidance Rule (GAAR) to plug taxation loopholes, but yet recognise genuine players, will be applicable from 2017-18.
“Stakeholders and industry associations had requested for clarification on implementation of GAAR provisions and a working group was constituted by Central Board of Direct Taxes (CBDT) to examine the issues raised,” an official statement said.
“Accordingly, CBDT has issued the clarifications on implementation of GAAR provisions today.”
In line with the promise that India will not levy any tax with retrospective effect, grandfathering (or the application of old rules on certain transactions) will be available in investments made prior to April 1 this year.
Among the provisions, if the jurisdiction of a foreign portfolio investor is finalised based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, these rules will not apply.
They will also not interplay with the right of the taxpayer to select the method of implementing a transaction.
These include compulsorily convertible instruments, bonus issuess or stock splits, consolidation of holdings in respect of investments made prior in the hands of the of the same investor.
“It has also been clarified that the adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies and the same are required to be tackled through domestic anti-avoidance rules,” the statement said.
Finance Minister Arun Jaitley, while presenting the Budget in 2015-16, had informed Lok Sabha the deferring of applicability of GAAR by two years.
GAAR, proposed by former Finance Minister Pranab Mukherjee in budget 2012-13, is an anti-tax avoidance rule, which prevents tax evaders from routing investments through tax havens like Mauritius, Luxembourg and Switzerland.
It evoked sharp reactions from foreign as well as domestic investors who feared that the law could be misused by taxmen to harass investors.
The Finance Ministry had earlier said it would implement GAAR from April, 2014.
The provisions will, when implemented, apply to tax benefits arising from transactions valued at above Rs 3 crore ($500,000).
Retrospective taxation has evoked much criticism from domestic and overseas investors, notably Britain-based telecom major Vodafone.
Vodafone was slapped with a Rs 20,000 crore retrospective capital gains tax after it acquired the telecom assets of Indian conglomerate Essar Group via Vodafone Mauritius.
GAAR was first proposed in 2010, targeting transactions made specifically to avoid taxes by companies such as Vodafone and Hutchison Essar.