Market Rejoices Over Postponement Of GAAR

The Finance Ministry is doing its best to improve the sentiments of investors, be it Indian or foreign investors. In a recent development, the ministry has said that the much-debated General Anti-Avoidance Rules (GAAR) shall be effective only from April 1, 2015 instead of April 1, 2013, as was initially proposed. While the Shome committee headed by Parthasarathi Shome has recommended that GAAR be postponed by three years, the ministry has postponed it for two years and it will be effective in the assessment year 2016-17.

The GAAR proposal had earlier raised many an eyebrow, especially among FIIs. The deferment is a much welcomed step, as it would reassure investors from abroad and will the clear clouds of doubt regarding this aspect of the regulatory framework. GAAR would override the double-taxation avoidance agreement if an arrangement was solely aimed at avoiding taxes. It would not be invoked in case of those investing in stock markets through participatory notes.

The new ruling states that investments made before August 30, 2010 (which is also the day when the Direct Taxes Code was introduced in the Parliament), will not be taxed, even if the profits are made after April 2016. GAAR will apply on income made after the assessment year beginning April 1, 2016, on investments made after August 2010. The details are as mentioned in the table below:

Source: Business Standard

What Lies Ahead?

The decision to defer GAAR till April 1, 2015 will provide FIIs with time to grapple with the new provisions and to plan their affairs accordingly. It will also help the tax department to prepare itself for the enforcement challenges that lie ahead. However, what lies within the details and the language of the revised GAAR provisions, which the Government is expected to release soon, need to be closely watched. For the time being, though, the vibes are on the positive side, and that is reflected in the markets touching the 20k mark after a span of 2 years.