In a move that is likely to soothe the nerves of anxious investors, the government on Monday deferred by two years the controversial General Anti Avoidance Rules (GAAR) that seeks to empower taxmen to clamp down on deals and income suspected to have been structured only to avoid paying taxes.
“Having considered all the circumstances and relevant factors, the government has decided that provisions of Chapter 10A of the Income Tax Act (that deals with GAAR) will come into force from April 1, 2016 instead of April 1, 2014,” finance minister P Chidambaram told reporters.
The GAAR provisions, put forward in the budget for 2012-13, triggered howls of protest from global and domestic business leaders as it can potentially affect almost anybody and everybody.
For instance, many companies, experts had said, would have been forced to restructure salaries of employees if taxmen concluded that these were structured only to avoid taxes.
There was also a lurking fear among foreign institutional investors that they would have to pay to capital gains tax on investments in Indian markets.
Expectedly, the stock markets the cheered the move. The benchmark BSE Sensex jumped 243 points to close at two-year high of 19,906.41, a rise of 1.23%.
The 50-share NSE index Nifty shot up 72.75 points, or 1.22%, to 6,024.05.
Chidambaram said the decision to postpone GAAR's implementation was based on the recommendations of the Parthasarathi Shome Committee, which was set up in July to frame a roadmap on the tax avoidance proposals.
Chidambaram said the anti-avoidance rules would not apply to foreign funds that were not taking tax benefits from India's various tax treaties with other nations.
The rules would also not apply to non-resident Indians running foreign funds.
According to the proposed rules, investments made before August 30, 2010, would not attract tax provisions under the rules.“The modifications that we have done are fair, non-discriminatory, just and strike a balance between the interest of revenue and interest of investors... so, all apprehensions should now be set aside,” the minister said, adding that only those arrangements, made for the purpose of tax avoidance, will be brought under GAAR.