Foreign investors who route their investments through tax havens can heave a sigh of relief. The government on Monday deferred the implementation of the controversial general anti-avoidance rule (GAAR) by two years to April 1, 2016. The stock market celebrated by scoring handsome gains on Monday.

The government has also exempted overseas investors putting money in the Indian market through P-notes from the purview of GAAR. More, foreign institutional investors (FIIs) not registered in India will not be covered under the anti-avoidance rules.

The government has allowed foreign investors and non-resident Indians (NRIs) to invest through FIIs based outside India without attracting the provisions of GAAR, as and when it is implemented.

Laws similar to GAAR are increasingly used in many countries to check tax avoidance.

Finance minister P Chidambaram said that the government had accepted with some modifications most recommendations of the Parthasarathi Shome committee. The modifications alter GAAR provisions which originally gave powers to tax officers that could be misused to harass foreign investors. KPMG’s deputy CEO Dinesh Kanabar said: “Investments made via Mauritius are protected from changes in tax laws at present.” However, there is no clarity on the future of investments routed thro­ugh Mauritius governed by circular 789.

Otherwise, “the modifications that we have done are fair, non-discriminatory, just and strike a balance between interest of revenue and interest of investors. So, all apprehensions should now be addressed,” said Chidambaram.

However, other provisions are clear. Investments made before October 2010 and income accrued after 2016 will not be subjected to GAAR. “But those investors who put in money after October 2010 with income say in 2018 would be liable under GAAR,” Kanabar said.

More than 90 per cent of the Shome committee recommendations have been accepted. Implementation of GAAR in a less subjective manner and the formation of an independent panel to deal with compliance of GAAR have been welcomed.

K R Sekar, a partner at Deloitte Haskins & Sells, said, “Acceptance of Shome committee report ahead of the budget is certainly the most important step. Most global investors and industry have been waiting for acceptance of this fair report.”

Ketan Dalal, joint tax leader at PwC, said that though there was no mention of Mauritius in the finance minister’s statement, the government accepted that GAAR should not apply by implication as long as the Mauritius tax residency certificate was available. GAAR was sought to be extended even where one of its main purposes was to obtain a ‘tax benefit’; this was simply too wide. The government accepted the recommendation that it should be restricted to a situation where the ‘main purpose’ was to obtain a ‘tax benefit’, Dalal said.

Most significant fact is that GAAR would apply only if the main purpose of the arrangement is to obtain tax benefit. Earlier, the position was that GAAR would apply even if tax benefit was one of the main purposes. Chidambaram said that GAAR would apply only in cases where assessees availed of tax benefit of Rs 3 crore or more.

The proposal to implement GAAR last year had triggered an outcry from global industry groups and led to a fall in investment flows into India. The then finance minister Pranab Mukherjee deferred the implementation of the law by a year to April 1,2014. Subsequently, the prime minister set up the Shome panel to find ways of addressing concerns of investors.

In the latest provisions, the powers of assessing officials have been drastically reduced. To take action under GAAR, an assessing officer will have to issue a show cause notice giving reasons to the assessee before invoking provisions of chapter XA of the Income- tax Act. The chapter is on GAAR and became part of the law when the finance bill was amended in Parliament in last May.

Changes announced on Monday will become operative only after both Houses of Parliament amend this chapter. This is expected to happen when finance bill is passed as part of the budget exercise this year. The government has also accepted the industry and Shome committee proposal for an independent member while processing GAAR cases. The only modification is that Shome committee had originally recommended a five-member panel whereas the government proposed to set up a three-member panel.

Chidambaram said where GAAR and SAAR (specific anti-avoidance rule) come into force, only one of them would apply to a given case and guidelines would be made regarding the applicability of one or the other. The draft rules of GAAR, circulated by the Central Board of Direct Taxes, had drawn flak from various quarters for scaring investors.

No investor, Chidambaram said, “should now have any apprehension about his investments in India. Only those arrangements which have been made for the purpose of tax avoidance or obtaining tax benefit and considered as an impermissible arrangement will be brought under GAAR.”

Asked if tax officials could look into cases from August 30, 2010, till the implementation of GAAR, he said: “That they can go back is technically correct. But in order to go, you have to comply with a number of provisions in the I-T Act. If the assessment is completed, you can reopen the assessment only under very strict circumstances.”

(With inputs from Amit Mudgill)

krsudhaman@mydigitalfc.com