New Delhi: In a bid to allay fears of investors, the government on Thursday clarified that only income accruing after 1 April 2013 will be subject to the provisions of the general anti-avoidance rules (GAAR).
This essentially indicates that GAAR would not apply with retrospective effect to taxpayers’ income, as feared by many investors.
Draft guidelines notified late on Thursday recommended an income threshold for the rules to be applicable, but left it undefined.
The guidelines also put a time limit of 60 days for the assessing officer, in the event of a dispute, to approach the approving panel.
These safeguards are being inserted after consultations between the committee chaired by the director general of income tax (international taxation) and all tax stakeholders.
In a move that could potentially please the stock market, the government has proposed to keep foreign institutional investors subjecting themselves to India’s income tax laws outside the purview of GAAR.
However, the committee has proposed that some discretionary powers be retained with the tax authorities.
The draft guidelines say that though terms such as “misuse or abuse”, “bona fide purpose” and “lacks commercial substance” may be explained, it will only be an indicative list and not an exhaustive list.
“The guidelines provided through examples are based on specific facts. Whether GAAR may be invoked in any particular case would depend on the specific facts of that case,” it added.
The draft guidelines come a day after Prime Minister Manmohan Singh, who assumed an additional role of acting finance minister after Pranab Mukherjee stepped down to vie for the president’s post, told officials at a meeting that he was concerned that “investor sentiment is down and capital flows are drying up”.
He said he wanted to revive the “animal spirit” of an economy that was roaring with growth of well above 9% in the three years before the global financial crisis in 2008-2009.
“The market is having significant expectations that a lot of tax policy issues would get sorted out and there will be renewed focus on investment cycle,” said Nilesh Shah, chief executive of Envision Capital, an investment advisory firm in Mumbai.
“Markets are eyeing either fiscal measures, monetary measures, tax measures or clarity on policy issues to move further,” he added.
The GAAR rules sparked controversy when they were introduced in March, as economists and investors said the wording was vague, creating uncertainty at a time when the country needs capital inflows to help plug a widening current account deficit.
Foreign investors feared the government would use the rules to target portfolio investments routed through countries that have a double taxation avoidance treaty with India, such as Mauritius.
Mukherjee had sought to placate investors in May by deferring GAAR until 2013.
Reuters contributed to this story.