The finance ministry on Monday deferred implementation of the controversial General Anti-Avoidance Rules (Gaar) by two years to April 2016, as recommended by the Parthasarthy Shome-led committee, constituted by the PM in July 2012. The rules, part of the Direct Taxes Code Bill introduced in August 2010, were to be implemented in April 2014.
The stringent provisions, such as the onus of proof being on the investor, had shattered investor sentiment.
“An arrangement, the main purpose of which is to obtain a tax benefit, would be considered as an impermissible avoidance agreement. The current provision prescribing that it should be ‘the main purpose or one of the main purposes’ will be amended accordingly,” finance minister P Chidambaram said.
Experts hailed the move as a good one. “Deferring Gaar is a very positive step and should contribute to improving investor sentiment. This will reduce uncertainty,” said Pranav Sayta, tax partner, Ernst & Young.
Chidambaram said while investments using treaty havens will still be on the Gaar radar, those not taking that route will be free from it. “Gaar will not apply to such FIIs that choose not to take any benefit under an agreement under section 90, or section 90A of the Income Tax Act, 1961. Gaar will also not apply to non-residential investors in FIIs,” he said.
Other announcements pertained to threshold limit for invoking Gaar and time limits from the authorities.
“A monetary threshold of Rs3 crore of tax benefit in the arrangement will be provided to attract the provisions of Gaar. Time limit will be provided for the different authorities to exercise their powers. Where Gaar and specific anti-avoidance rules (Saar) are both in force, only one will apply to a given case, and guidelines will be made regarding applicability of one or the other,” said a communiqué from the finance ministry. “Investments made before August 30, 2010, will be grandfathered (old rules will be applicable to such investments, while new rules will apply to future ones).”
It added that the assessing officer will be required to issue a show cause notice containing the reasons to the assessee before invoking the provisions.