The government on Thursday published draft rules of the controversial general anti-avoidance rule (GAAR) that seeks to empower taxmen to clampdown on deals and income suspected to have been structured in a particular way only to avoid paying taxes.
The draft rules, based on the recommendations of a committee headed Director General of the Income Tax (International Taxation), came a day after Prime Minister Manmohan Singh met key officials to discuss ways to revive the sagging economy and, possibly, soothe the nerves of angry industrialists and anxious investors.
The committee has recommended that only income or transactions beyond a certain threshold limit will come under the provisions of GAAR. The threshold limit, however, has not yet been stipulated.
The committee also made it clear that GAAR will not apply retrospectively.
"Provisions of GAAR will apply to the income accruing or arising to the taxpayers on or after April 1, 2013," the committee said putting at rest concerns about taxmen clamping down older transactions.
The budget provision to empower taxmen to scrutinise older corporate transactions such as the Hutch-Vodfaone deal of 2007 and uncertainty over GAAR has sparked fears among global and domestic investors, who say this would choke foreign investment into India.
GAAR can affect both companies and individuals. Companies may be forced to restructure salaries of employees if taxmen conclude that these were structured only to avoid taxes.
Foreign institutional investors (FIIs) who invest through countries such as Mauritius to exploit bilateral tax treaties will be affected after GAAR comes into force.
It's feared that once GAAR is invoked FIIs will have to pay capital gains tax for their investment in Indian equities.