India notifies GAAR guidelines
Indian Finance Minister P Chidambaram announcing the delay in implementation of GAAR by 2 years at a press conference in January
Mauritius may soon lose its status as the prime investment platform for firms seeking to route investments into India, say tax experts. The controversial GAAR provision in India, which seeks to check tax avoidance by investors routing their funds through tax havens, will come into effect from April 1, 2016, according to a recent government notification released on September 26.
Notifying the rules of the General Anti Avoidance Rules (GAAR) framework allows the taxman to arm himself to invalidate transactions put through Mauritius with the intent of deliberately avoiding tax. The general anti-avoidance rules are a set of provisions in the Indian Income Tax law, which have been recently given more teeth to curb tax avoidance structures.
So far, India has lost out time and again in getting its tax treaty with Mauritius re-negotiated to introduce a limitation of benefit clause or do away with capital gains tax exemption.
The provision of GAAR will apply to entities availing tax benefit of at least INR 3 crore (around Rs 1.5 crore), according to the notification dated September 23. It will cover foreign institutional investors (FIIs) that have claimed benefits under any Double Tax Avoidance Agreement (DTAA). However, investments made by a non-resident via offshore derivative instruments or Participatory notes, a preferred route for HNIs and hedge funds from abroad, through FIIs, are exempt.
Also, investments made before August 30, 2010, will not be scrutinised under GAAR, it said, adding the provisions will apply to assessees that obtain tax benefits on or after April 1, 2015.
The GAAR provisions were introduced in the 2012-13 Indian Budget by then Finance Minister Pranab Mukherjee to check tax avoidance and were to have come into effect from April 1, 2014. However, to soothe nervous investors, the current Finance Minister of India, P Chidambaram, in January announced the postponement of the implementation of GAAR by two years to April 1, 2016.
While there is still some time to go for the GAAR framework to come into effect, Indian Finance Minister, P Chidambaram, has decided to notify rules in advance to give a boost to the sagging stock market.
Foreign investors looking to make portfolio investments into India or parking funds in Foreign Institutional Investors (FIIs) through offshore derivate instruments such as Participatory Notes will face no issues from a GAAR perspective. Also, since the GAAR rules will only apply in cases where the tax benefit is over INR 3 crore, small taxpayers can breathe easy.
The only battle India seeks to wage through a stricter GAAR is on FII investments that are routed through treaty countries and loopholes in the treaty are exploited by such investors. Shell companies, companies that are set up in a tax haven with the sole agenda of routing funds to an attractive investment destination and have no core operations to justify their existence in a particular jurisdiction, will need to look elsewhere to make a quick buck.
Source: Press Trust of India