The Industry has cheered the government™s deferment of the implementation of GAAR (General Anti Avoidance Rule) which was surrounded by controversy ever since the day it was announced. The tax-avoidance rule has since been deferred till April 2016. This has come with great relief to the industry and markets which responded with a 2-year high at BSE, by jumping 243 points . Industries and Investor bodies had been crying hoarse on the negative effect that this rule would have on investor sentiments from within India and more so from overseas. This order came at a time when the business confidence within the country on governance is already very low.
Finance Minister Mr. P Chidambaram announced the 2 year GAAR implementation deferment decision just before he is scheduled to leave for tours in Asia and also Europe with the idea of wooing foreign investors. He said that the government has accepted most of the recommendations of the Shome Committee, on this Rule and hence decided on this deferment.
Prominent industrialists and industry biggies have voiced their opinions in favour of this decision. It was widely felt that the decision would in turn stimulate the much eroded business confidence of Indian and foreign investors. The confidence had taken a beating on the announcement of this proposal.
It was also felt that both, domestic and global economic conditions would improve in the next two years. If the GAAR is imposed after 2 years, there would not be much impact on both, foreign and domestic investments. Most opined that the deferral is a good step.
The GAAR rules were put up for review under the Shome Committee by Prime Minister Manmohan Singh, after the then Finance Minister Pranab Mukherjee resigned to contest the Presidential elections. Under Shome, the expert panel recommended an effective and deferred implementation plan of 3 years. However, the CBDT (Central Board of Direct Taxes) had resisted the three year deferral, for which reason, the Government had to find a middle path and instead deferred it for two financial years instead.
It may be remembered, that the Government had sought to put together a policy by which the organizations seeking benefits of the Double Taxation Avoidance regime between countries like Mauritius and India, would take advantage of the tax haven just to avoid paying taxes on capital gains in India. This was mainly targeted to those transactions by which the investments were being routed to India via tax havens like Mauritius. Investors, however felt, that this would open a can of worms and the rules would give the taxation department, discretionary powers which might lead to undue harassment.
GAAR, when enforced, will actually not apply to FIIs (Foreign Institutional Investors) not taking benefit of a tax regime. This leaves open a possibility of it applying to all those investors who are using Mauritius as an operational and investment routing base.