Implementation of GAAR likely to be deferred by a year

The government is likely to defer implementation of the controversial General Anti-Avoidance Rules (GAAR) till April 2017, and exempt transactions made up to March 2013 from GAAR, as it seeks to improve business sentiment.

The government earlier proposed imposing the GAAR provisions from 1 April 2016, for those claiming tax benefit of over Rs3 crore. The rules are aimed at minimising tax avoidance for investments made by entities based abroad.

The finance ministry, which is preparing the budget for 2014-15, is considering deferring implementation of GAAR by a year, according to a Press Trust of India report citing official sources.

As per the new proposal, investments made after March 2013 will be covered under GAAR with effect from assessment year 2017-18.

The sources said the benefits of grandfathering, or exemptions, would be made for business arrangements entered into up to March 2013 and not August 2010 as notified earlier.

Under the present GAAR notification, investments made up to 30 August 2010 were not to be scrutinised.

"The tax department needs to work further on GAAR provisions and realign some of the regulations," a source said.

The current provisions apply only to foreign institutional investors (FIIs) that have claimed benefits under a double tax avoidance agreement (DTAA).

Investments made by a non-resident by way of offshore derivative instruments or P-Notes through FIIs will not be covered by the GAAR provisions.

The GAAR provisions were introduced in the 2012-13 budget by then Finance Minister Pranab Mukherjee to check tax avoidance and were to have come into effect from April 1, 2014. The proposal generated controversy, with investors getting apprehensive about harassment by tax authorities.

To soothe the nerves of jittery investors, in January 2013, the then finance minister P Chidambaram announced the postponement of the implementation of Chapter X-A of the I-T

The government's decision to amend the provisions was in response to fears by investors that the tax department, armed with discretionary powers, would use them even in cases where tax avoidance was not the intent.