<div>Giving a big relief to overseas investors, the government has postponed implementation of controversial GAAR provisions by two years to April 1, 2016. The decision earned a positive market reaction and is likely to help attract more capital inflows.</div><div> </div><div>"Having considered all the circumstances and relevant factors, the government has ...decided that provisions of Chapter 10A of the Income Tax Act (dealing with GAAR) will come into force from April 1, 2016 as against April 1, 2014," Finance Minister P Chidambaram said in New Delhi on 14 January 2013.</div><div> </div><div>The BSE Sensex rose as much as 1 per cent after the news of the delay and after a slower-than-expect rise in inflation cemented hopes for an interest rate cut this month.</div><div> </div><div>"The indication from the government seems to suggest attracting capital flows is imperative for the economy and to fund the current account deficit," said Dhananjay Sinha, co-head of institutional research at brokerage Emkay Global.</div><div> </div><div>Sinha added that the deferral was in line with India's stated objectives and recent policy measures like opening up its supermarket and aviation sectors, which were also aimed at attracting increased foreign capital inflows.</div><div> </div><div>According to the proposed rules, investments made before August 30, 2010, would not attract tax provisions under the rules. However, they would apply to investors who route through tax-havens such as Mauritius for getting tax benefits.</div><div> </div><div>The General Anti Avoidance Rules (GAAR) provisions, introduced by the then Finance Minister Pranab Mukherjee in the Budget 2012-13, were aimed at checking tax avoidance by overseas investors. The proposal, however, generated controversy, with investors expressing apprehensions that it would result in unnecessary harassment by tax authorities.</div><div> </div><div>The decision to postpone the implementation, Chidambaram said, follows the recommendations of the Shome Committee which was set up by Prime Minister Manmohan Singh in July last year to look into investor concerns.</div><div> </div><div>The government, Chidambaram further said, has accepted major recommendations of the panel with some modifications.</div><div> </div><div>"The modifications that we have done are fair, non-discriminatory, just and strike a balance between interest of revenue and interest of investors. So, all apprehensions should now be set addressed," he said.</div><div> </div><div>The GAAR provisions, the minister also clarified, would override the double taxation avoidance agreement (DTAA) benefits if the arrangements were intended solely to evade taxes.</div><div> </div><div>No investor, Chidambaram said, "should now have any apprehension about his investments in India. Only those arrangements, which have been made for the purpose of tax avoidance, will be brought under GAAR, he added.</div><div> </div><div>He also clarified that investments made by Non-Resident Indians (NRIs) will not be covered by the provisions of GAAR.</div><div> </div><div>About the applicability of the GAAR provisions, he said FII investments seeking benefits under Sec 90 and Sec 90 (A) of the I-T Act (dealing with DTAA) would be covered.</div><div> </div><div>The minister said only those arrangements which are aimed at only obtaining tax benefit would be considered as 'impermissible arrangement' and would attract GAAR.</div><div> </div><div>As per the original GAAR provisions under Chapter 10 (A) of Finance Bill, 2012, the anti-tax avoidance provisions could be invoked "if one of the purposes" was to obtain tax benefit.</div><div> </div><div>The Minister clarified that there would be a threshold limit of Rs 3 crore of tax benefit for invocation of GAAR, as suggested by the Shome panel.</div><div> </div><div>Moreover, Chidambaram said, that investments made before August 30, 2010, would not attract the provisions of GAAR.</div><div> </div><div>On whether tax officials can look into cases between August 30, 2010, and the date for implementation of GAAR, he said: "They can go back is technically correct. But in order to go, you have to comply with a number of provisions in the I-T Act. If the assessment is completed, you can reopen the assessment only after very strict circumstances."</div><div> </div><div>"This decisions (of GAAR rules modifications) have by and large addressed the concerns that were expressed by investors ... Most of the apprehensions I think have been removed now," Chidambaram said.</div><div> </div><div>Chidambaram also said officials from India and Mauritius would meet by March to review the provisos of a bilateral tax treaty, signed in 1982.</div><div> </div><div>Since the island nation does not tax capital gains, the treaty has been misused by many investors to evade taxes.</div><div> </div><div>India gets nearly 40 per cent of its total foreign direct investment inflows through Mauritius, besides large portfolio investments.</div><div> </div><div>The minister said the minimum threshold to come under the GAAR would be 30 million rupees, and that would mean large number of taxpayers would not be effected.</div><div> </div><div>The current account deficit hit an all-time high of 5.4 percent of gross domestic product in the July-September quarter, putting the rupee under pressure and increasing the reliance on volatile capital flows to fund the shortfall.</div><div> </div><div>This reliance on foreign capital inflows to bridge the gap is regarded as a serious fault line in the economy, haunted by memories of a 1991 balance of payments crisis when the central bank sent 47 tonnes of gold to Europe as collateral for a loan to avert a sovereign default.</div><div> </div><div>The government is likely to approach parliament next month to water down the rules that damaged investor confidence, which may help settle British-based Vodafone Group Plc's long-running $2 billion tax dispute.</div><div> </div><div>(Agencies)</div>
