GAAR not to apply on income from investments before April 1

The industry has been demanding that GAAR provisions should apply prospectively
To clear the air on retrospective applicability of the stringent anti-avoidance GAAR rule, the I-T department has said the same will not apply to income from transfer of investments before April 1, 2017.

General Anti-Avoidance Rule (GAAR), which will kick in from April 1 next year, contains provisions to prospectively tax overseas deals involving local assets and are aimed at minimising tax avoidance and evasion by entities based in tax havens.

The amendments carried out in the Income Tax Rules state that Rule 10U(1)(d) has been amended to provide that GAAR will not apply to income earned/received by any person from transfer of investments made before April 1, 2017. Earlier, this date was August 30, 2010.

Further, Rule 10U(2) has been amended to provide that GAAR will apply to any arrangement, irrespective of the date it has been entered into, if tax benefit is obtained on or after April 1, 2017. Earlier, this date was April 1, 2015.The industry has been demanding that GAAR provisions should apply prospectively. Through this amendment to the I-T Rules, the tax department aims to smoothen the procedure for GAAR implementation by removing any inconsistency.

“The rules make the application of GAAR on income from investments prospective in as much as any investment made prior to April 1, 2017 will stand grandfathered and will be outside the ambit of GAAR. This is a positive step as this will put to rest any controversy whether investments made prior to implementation of GAAR would be affected or not,” said Rahul Jain, Partner Nangia & Co. Tax consultancy firm PwC said only income from transfer of investments made prior to April 1, 2017 has been grandfathered.

“Such grandfathering is a welcome step. It should allay some of the concerns with respect to implementation of GAAR provisions and provide certainty to taxpayers,” PwC said.The amendment to the GAAR provisions is also in line with the timeline for implementation of the revised India-Mauritius DTAA.

According to the revised treaty, companies routing funds into India through Mauritius after March 31, 2017, will have to pay short-term capital gains tax at half the rate prevailing during the two-year transition period. The levy is currently at 15 per cent. The full rate will kick in from April 1, 2019.

“While this provision implies a certain degree of retroactive operation as it covers arrangements made before the cut-off date of April 1, 2017, one hopes that GAAR will be called into operation only to address the more egregious forms of tax avoidance and genuine arrangements made for business considerations are not unnecessarily hit,” Jain said.

The industry has been demanding that the tax department come out with specific guidance note on when this provision will get triggered.

GAAR was introduced in his 2012-13 Budget speech by the then finance minister Pranab Mukherjee with a view to checking tax evasion and avoidance. However, its implementation was repeatedly postponed because of apprehensions expressed by foreign investors.

GAAR, which was originally to be implemented from April 1, 2014, will now come into effect from April 1, 2017 (assessment year 2018-19).

There have been fears that through the use of GAAR, the government may try to tax P-Notes as indirect investments, which could attract a tax rate of up to 15%. To avoid tax altogether under GAAR, an investor may have to prove that P-Notes were not set up specifically to avoid paying taxes.