Indian Government to Defer GAAR to 2016

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Jan. 16 – On Monday January 14, Indian Finance Minister P. Chidambaram stated that India would delay the implementation of its controversial rules on tax avoidance known as the General Anti-Avoidance Rules (GAAR) to 2016. The decision earned positive reactions from the market, and is likely to help attract more capital inflow and improve investor sentiment.

Ever since its inception, the GAAR has generated controversy from investors who have expressed that it would result in unnecessary harassment by tax authorities. India had initially planned to implement the GAAR by April 2014, but the rules are now set to come into effect on April 1, 2016.

The decision to postpone GAAR implementation follows recommendations put forth by the Shome Committee. Set up by Prime Minister Manmohan Singh to look into investor concerns, the committee suggested that the legislation be delayed by three years, and recommended some changes to the legislation itself.

The rules will only apply to foreign investors that seek to take advantage of India’s double-taxation avoidance agreements (DTAA) with other countries, and will not apply to investors who put money in foreign funds. Investments made before August 30, 2010 will not be covered by the GAAR, with the minimum monetary threshold to invoke the GAAR provisions set at 30 million rupees.

“The modifications that we have done are fair, non-discriminatory, just and strike a balance between interest of revenue and interest of investors. So, all apprehensions should now be set [and] addressed,” Chidambaram said.

The Minister also clarified that the GAAR provisions would override the DTAA benefits intended to solely evade taxes, and that arrangements aimed at only obtaining tax benefits are likely to be called “impermissible arrangements” which would, in turn, attract the GAAR.

The deferral of the GAAR is in line with India’s recent stated objectives and policy measures aimed at attracting increased foreign capital inflows.

“The indication from the government seems to suggest that attracting capital flows has become imperative to fund the growing current account deficit,” stated Dhananjay Sinha, co-head of institutional research at Emkay Global.

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