A day after the Republic Day celebrations, the Finance Ministry clarified that the General Anti Avoidance Rule (GAAR) will come into effect from April 1, 2017. Some of you may recollect, an earlier instance when implementation of GAAR was mentioned by the UPA-2 in its 2012- 13 Budget and the stock markets tumbled, fearing retrospective taxation and lack of clear tax treatment on investments.
The GAAR is an anti-tax avoidance rule which prevents tax evaders from routing investments through tax havens like Mauritius, Luxembourg or Switzerland. The current clarification by the Central Board of Direct Taxes (CBDT) on GAAR has not impacted the stock markets because the CBDT has clarified that GAAR will not apply simply because the FPI is located in or investing via a tax-efficient jurisdiction. Such clarity has been welcomed by FPIs, who have significant investments in India and also act as the sheet anchor on many occasions to stabilise the volatile stock markets in India.
In its current form, the GAAR will not interplay with the right of the taxpayer to select or choose method of implementing a transaction. Further, grandfathering as per Income Tax rules will be available to compulsorily convertible instruments, bonus issuances or split/consolidation of holdings in respect of investments made prior to April 1, 2017 i