In a bid to bring clarity in tax rules for foreign entities in India and their transactions, the government on Friday said the General Anti-Avoidance Rule (GAAR) to plug taxation loopholes, but yet recognise genuine players, will be applicable from 2017-18.
"Stakeholders and industry associations had requested for clarification on implementation of GAAR provisions and a working group was constituted by Central Board of Direct Taxes (CBDT) to examine the issues raised.
"Accordingly, CBDT has issued the clarifications on implementation of GAAR provisions today (On Friday)," an official statement said.
In line with the promise that India will not levy any tax with retrospective effect, grandfathering (or the application of old rules on certain transactions) will be available in investments made prior to April 1 this year.
Among the provisions, if the jurisdiction of a foreign portfolio investor is finalised based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, these rules will not apply.
They will also not interplay with the right of the taxpayer to select the method of implementing a transaction.
These include compulsorily convertible instruments, bonus issues or stock splits, consolidation of holdings in respect of investments made prior in the hands of the same investor.
"It has also been clarified that the adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies and the same are required to be tackled through domestic anti-avoidance rules," the statement said.
Finance Minister Arun Jaitley, while presenting the Budget in 2015-16, had informed Lok Sabha the deferring of applicability of GAAR by two years.
GAAR, proposed by then Finance Minister Pranab Mukherjee in budget 2012-13, is an anti-tax avoidance rule, which prevents tax evaders from routing investments through tax havens like Mauritius, Luxembourg and Switzerland.
It evoked sharp reactions from foreign as well as domestic investors who feared that the law could be misused by taxmen to harass investors.
The Finance Ministry had earlier said it would implement GAAR from April 2014.
The provisions will, when implemented, apply to tax benefits arising from transactions valued at above Rs 3 crore ($500,000).
Retrospective taxation evoked much criticism from domestic and overseas investors, notably Britain-based telecom major Vodafone.
Vodafone was slapped with a Rs 20,000 crore retrospective capital gains tax after it acquired the telecom assets of Indian conglomerate Essar Group via Vodafone Mauritius.
GAAR was first proposed in 2010, targeting transactions made specifically to avoid taxes by companies such as Vodafone and Hutchison Essar.
The industry and analysts welcomed the CBDT clarification that the investments made prior to April 1 will not call for retrospective tax, thus allaying investor concerns.
"The CBDT clarification that GAAR would be applicable from April 2017 is seen as a positive development. This sets aside any possibility of retrospective applicability from the current financial year," said D.S. Rawat, secretary general of Associated Chambers of Commerce and Industry of India (Assocham).
"It removes uncertainty and augurs well. Besides, it provides safeguards as well against discretion at the junior levels," he added.
Gokul Chaudhri, Leader, Direct Tax, BMR and Associates LLP, said that the GAAR clarifications are timely and addresses concerns of the investor community.
"The clarifications are timely and helpful as these address some of the immediate concerns of the investor community. The responses that investments made prior to April 1, 2017 stand grandfathered, will allay investor concerns. Equally positive is the statement that further clarifications will be made available on doubts that may persist with stakeholders," Chaudhri said.
Radhika Jain, Director, Grant Thornton Advisory, said: "Clarifications on GAAR bring welcome certainty in some areas such as confirmation that grandfathering would apply to convertible instruments issued prior to April 1."
Amit Jindal, Director, Felix Advisory, told IANS that the retrospective effect of GAAR has been avoided as CBDT has clarified that all structures formed before April 1, 2017, will be grandfathered.
Girish Vanvari, Partner and National Head of Tax, KPMG, however, felt that the industry was not ready for its execution and it should be further deferred.
"The issue of GAAR clarifications by the CBDT today indicates that GAAR is on the anvil effective April 1, 2017 and is unlikely to be deferred. The best case would be to defer GAAR till the industry is ready for execution," Vanvari told IANS.
"The guidelines, are step in the right direction towards execution of GAAR, but has many areas where the guidance could be firmer and more conclusive (like special purpose vehicles in tax free jurisdiction)," he further said.