GAAR to take effect from 1 April 2016

The General Anti Avoidance Rules (GAAR), which seek to check tax avoidance by foreign investors routing funds through tax havens, will come into effect from 1 April 2016, a government notification said.

The provisions of the anti-avoidance tax rules will apply to business arrangements with a tax benefit of Rs3 crore or more, according to the notification issued on 23 September.

The GAAR provisions will apply to foreign institutional investors (FIIs) that have claimed benefits under any double tax avoidance agreement (DTAA).

However, the GAAR provisions will not apply to investments by a non-resident by way of offshore derivative instruments or P-Notes routed through FIIs.

The sparing of FIIs that do not avail of benefits under double taxation pacts and on P-Note investments made on behalf of clients would be of much relief to stock markets.

The controversial provisions of GAAR, frowned upon by some of the major foreign investors such as Vodafone will not now apply to investments made before 30 August 2010. It will not also apply to income tax assesses who obtain tax benefit on or after 1 April 2115.

The GAAR, introduced in the 2012-13 budget by then finance minister Pranab Mukherjee to check large-scale tax avoidance by routing investments through offshore tax havens, was to have come into effect from 1 April 2014. The proposal generated controversy and investors started withholding investments over apprehensions of harassment by tax authorities.

Finance minister P Chidambaram intervened to soothe the nerves of jittery investors and, in January, the government announced the postponement of the implementation of the provisions of GAAR by two years, ie, till 1 April 2016.

The provisions of GAAR have been redefined to make investments whose main purpose was tax avoidence ''impermissible''.

Under the original GAAR proposals, the anti-tax avoidance provisions could be invoked "if one of the purposes" was to obtain tax benefit.

"Where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax shall be determined with reference to such part only," the notification said.

The notification is in line with recommendations of the Parthasarathi Shome Committee, set up by Prime Minister Manmohan Singh in July last year, to address the concerns of foreign investors.