GAAR may spare P-Notes, Mauritius funds and Vodafone, but after PM’s nod

The prime minister's office today sought to distance itself from the clarifications issued on the General Anti-Avoidance Rules (GAAR), saying that the draft GAAR rules had not been seen by Prime Minister Manmohan Singh.

''These (draft guidelines) have not been seen by the prime minister and will be finalised with the approval of the prime minister, who holds the finance portfolio, only after considering the feedback received," the PMO said in a release.

The new guidelines on GAAR will now be issued after consultations with the prime minister, finance secretary R S Gujral clarified today.

According to the note on the finance ministry website last evening, GAAR will not be invoked against holders of participatory notes (P-Notes) as it was seen to be affecting market participation by foreign funds. Nor did the guidelines talk about issues like Mauritius funds or Vodafone type tax escapades.

P-Notes, a derivative instrument that allows overseas investors to buy Indian shares without going through the mandatory 'know your customer' norms, have been a key source of fund flows into India's stock markets.

The draft guidelines for GAAR released by the Central Board of Direct Taxes (CBDT) says GAAR will not be invoked on FIIs or non-resident investors in situations when the FII is ready to subject itself to tax under the domestic tax laws.