Here are the highlights of the amended GAAR rules.
Accepting most of the Shome committee recommendations on GAAR, the
finance ministry has deferred the implementation of GAAR to assessment
year 2016-17. However, investments made after August 30, 2010 will
come under the GAAR scanner, effectively making GAAR applicable with
retrospective effect. There will also be a monetary threshold of Rs 3
crore of tax benefit for GAAR to be applicable.
Crucially, investments made by non residents in FIIs, including
Participatory Notes will not be come under the anti-avoidance regime.
However, contrary to earlier rules, GAAR will override India's tax
treaties with countries such as Mauritius, but only if the "tax
arrangement" is deemed "impermissible".
This is likely to bring post box structures and round tripping of
funds from tax havens under the scanner. The definition of an
impermissible arrangement though has been diluted- it shall now be an
arrangement whose main purpose is to avail tax benefits.
The finance ministry has also given into industry's demand for an
external member in the approving panel - a three-member panel that
will be headed by a retired or serving High Court judge and will
include an income tax official.
But, two key questions remain. Firstly, if GAAR overrides the
Mauritius treaty, will Circular 789 of 2000 that provides capital
gains tax exemption still stand? The answer to this will determine the
fate of investments from Mauritius. Secondly, what is the fate of
Shome's suggestion to do away with the Short Term Capital Gains tax?
Has it been accepted and will it be announced in the forthcoming
Budget?
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