Moneycontrol Bureau

Finance minister P Chidambaram on Monday deferred implementing the controversial GAAR (General Anti-Avoidance Rules) aimed at curbing tax evasion, to April 2016. This is in line with what the Shome Committee reviewing the rules had recommended to the government.

The postponement will be widely cheered by foreign institutional investors; mostly those which misuse tax treaties to avoid paying tax in India. But the deferment, in a way, also show’s the government’s inability to crack down on tax evaders despite enough evidence of massive revenue losses of foreign money flowing into the country through shell companies in tax havens like Mauritius.

“An arrangement, the main purpose of which is to obtain a tax benefit, would be considered as an impermissible avoidance arrangement,” Chidambaram said at a press conference to announce the final GAAR, after incorporating the recommendations of the Shome Committee.

GAAR will not apply to FIIs that choose not to take any benefit under any tax treating India has with other countries, and also will not apply to non-resident investors in FIIs.

Investments made before August 30, 2010, the date of introduction of the Direct Taxes Code (DTC) Bill, will be exempt from the provisions of GAAR, under the revised rule.

While determining whether an arrangement is an impermissible avoidance arrangement, it will be ensured that the same income is not taxed twice in the hands of the same tax payer in the same year or in different assessment years.

Among other clauses, a monetary threshold of Rs 3 crore of tax benefit in the arrangement will be provided in order to attract the provisions of GAAR. Where a part of the arrangement is an impermissible avoidance arrangement, GAAR will be restricted to the tax consequence of that part which is impermissible and not to the whole arrangement.

GAAR laws were introduced in last year’s Budget tabled by Pranab Mukherjee and passed in the Finance Bill. However, following opposition from foreign investors, the government said it would defer implementation of GAAR until 2013.

After P Chidambaram replaced Mukherjee as Finance Minister, a 4-member committee headed by ICRIER chief and taxation expert Parthasarathi Shome was set up to review the rules.