India defers GAAR implementation by two years

Announcing this, Finance Minister P. Chidambaram said the government had accepted the major recommendations of the Parthasarthi Shome committee, appointed last year to look into the concerns of foreign investors, who are against the GAAR.

Chidambaram said the tax proposal will not apply to foreign institutional investors run by by non-resident Indians and will ensure that the same income is not taxed twice.

The finance ministry had earlier said it would implement GAAR (General Anti-Avoidance Rules) from April, 2014.

The finance minister clarified that investments made before August 2010 will be grandfathered.

GAAR, which was proposed in 2012-13 budget to prevent tax evasion, evoked sharp reactions from foreign as well as domestic investors who feared that the law could be misused by taxmen to harass investors.

Planning Commission chairman Montek Singh Ahluwalia said the GAAR deferral as a step in the right direction as investors had started viewing the controversial tax norms as a negative.

GAAR became part of the law when the finance bill was passed by Parliament.

Following the Chidambaram's announcement, the Sensex shot up 155 points to 19,829 levels while the Nifty broke the 6,000 mark.Here are the highlights of the amendments:

--If a tax structure is impermissible, GAAR will apply

-- No treaty override in new provision

-- GAAR will ensure same income is not taxed twice in the hands of the same taxpayer in the same year or in the next assessment year

-- GAAR will not apply to such FIIs that choose not to take any benefit under section 90 and 90A of the IT Act

-- If there is a tax avoidance arrangement, the existing provisions of the IT act say that GAAR provisions will prevail.