FinMin notifies FII-friendly GAAR

FIIs not seeking benefit under DTAA, participatory notes spared; experts concerned at grandfathering rules

The finance ministry has notified the much-awaited General Anti-Avoidance Rules (GAAR), which would only apply to arrangements over Rs 3 crore from 2015-16 or assessment year 2016-17. This was also the recommendation of the Parthasarathi Shome committee.

Experts say stock markets will have a lot to cheer, as the government has accepted the committee’s recommendation that foreign institutional investors (FIIs) not seeking benefits under double taxation avoidance agreements (DTAA) will escape GAAR. “Similarly, investment in participatory notes will not be subjected to GAAR,” said N C Hegde, partner, Deloitte Haskins & Sells.

However, experts expressed concern at some provisions such as invoking GAAR from assessment year 2016-17 even if investments were made prior to August 2010.

According to Hegde, GAAR was originally expected to come from 2010 along with the Direct Taxes Code (DTC). Hence industry was worried that investments made since 2010 would also invoke GAAR.

The rules say any income from transfer of investments made before August 30, 2010,  would not come under GAAR.

However, the rules also say GAAR would apply to any arrangement, irrespective of the date on which it has been entered into, if the tax benefit is obtained from April 1, 2015.

It means if investors come under DTAA from April 1, 2015, their arrangements could come under GAAR even if  entered into before August 1, 2010, Hegde said. “Though there seems to be an intention to grandfather investments made before August 31, 2010, the exemption is not very happily worded. Further, the exemption will not apply once GAAR is effective from April 1, 2015 (financial year), negating the exemption significantly.”

Grandfathering is a provision to apply old rules till a specified date, while new rules are announced.

Rahul Garg, direct tax leader with PwC India, said the benefit of grandfathering has been limited — first to investments made before August 2010 and secondly only for benefit up to March 31, 2015.

The Shome committee had said that the rules which are specified in special anti-avoidance agreements should override GAAR, Hegde said. “However, this does not find mention in the rules.”

GAAR was one of the measures proposed by the government that drew flak from foreign investors. After Pranab Mukherjee left the North Block to become President, the government appointed a committee under Shome to review the GAAR.

LESS TAXING

* GAAR aims to check tax evasion

* To come into effect by April 1, 2015

* Applicable to entities availing tax benefit of at least Rs 3 crore

* Was originally expected to come from 2010 along with the Direct Taxes Code

* Does not apply to investment in participatory notes