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Government notifies implementation of GAAR from April 2016



Updated On - Friday, 04 October 2013

27 September 2013

NEW DELHI: India has said all investments made by foreign investors prior to August 2010 will not attract the controversial tax rules, the General Anti-Avoidance Rules or GAAR. The government on Thursday notified the much-diluted GAAR provisions that will come into effect from April 2016 and apply to business arrangements with a tax benefit exceeding 3 crore.

"The Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962...," the notification said. The GAAR provisions were introduced in the 2012-13 Budget by Pranab Mukherjee to check tax avoidance and were to come into effect from April 1, 2014. However, sharp criticisms prompted Mukherjee to defer them by a year.

Prime minister Manmohan Singh subsequently set up a panel under Partho Shome to review the proposals.

The Shome committee suggested that the rules be deferred by three years, arguing that more time is needed to create administrative machinery for its implementation and called for intensive training of officials.

Finance minister P Chidambaram in January this year announced the postponement of the implementation of GAAR by two years to April 1, 2016, and changes in the framework, based on the recommendations of the Shome panel.

As per the notification, GAAR would be applicable to only to foreign institutional investors that have not taken the benefit of an agreement under Section 90 or Section 90A of the I-T Act or Double Taxation Avoidance Agreement (DTAA). It would also not apply to business arrangements where the "tax benefit in the relevant assessment year arising, in aggregate, to all parties to the arrangement does not exceed a sum of 3 crore."

"Where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax shall be determined with reference to such part only," the notification said.

Before invoking the GAAR provisions, tax officials would have to be "issue a notice in writing to the assessee seeking objections, if any, to its applicability.

Tax experts, however, questioned the change proposed regarding grandfathering of arrangements made prior to August 30, 2010.

"Good part is that investments made prior to 2010 will be clearly out of GAAR scrutiny but the rules place other arrangements under the scrutiny of GAAR. Except for investments the uncertainty does not go away," said Sudhir Kapadia, National Tax Leader, EY.

"The grandfathering is merely a mirage. Only income from investments sold before August 2010 will be grandfathered. This means investments made before August 2010 but sold after GAAR becomes effective will be subject to GAAR," said Shefali Goradia, Partner, BMR Advisors.

Published by: The Economic Times

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