Will examine and modify GAAR if required, says FM

Amid fears that FIIs may be taxed for short-term capital gains in stock markets, the government today said it will examine and modify the General Anti Avoidance Rules (GAAR) if required.

"I will examine and modify GAAR as and when required. This is essential for anti-avoidance," Finance Minister Pranab Mukherjee said in Parliament today.

In his Budget for 2012-13, Mukherjee had said that the government wanted to introduce GAAR in order to "counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel".

Securities and Exchange Board of India Chairman UK Sinha had said yesterday the government "is going to have a new look at tax avoidance, so they they are going to work in that way".

The fear of GAAR had spooked stock markets which tanked 2% yesterday on concerns that all short-term capital gains made by FII and P-Note investments would be taxed. The Sensex, however, recovered today rising over 200 points.

Meanwhile, Finance Ministry sources seeking to allay fears that Participatory Notes -- an instrument through which FIIs unregistered with Sebi invest in stock markets -- said that the I-T department will have to first prove the intention of avoidance before making GAAR applicable.

"GAAR is not created to target any class of financial instruments. The onus of proving tax avoidance lies mainly with the government and partially on the assessee," sources said.

"All benefits which a person is entitled in a DTAA [Double Taxation Avoidance Agreement] treaty can be overruled or denied if GAAR is invoked," sources said.

Provisions of GAAR will be applicable from April 1 and not with retrospective effect.