Industry wants changes in GAAR guidelines, govt panel to meet again

Industry has asked the government to further modify the guidelines for the proposed General Anti-Avoidance Rules or GAAR. A finance ministry panel on Monday met industry representatives including from the foreign investor community to understand their concerns on the new regime, which will come into effect from April 1, 2013.

"The GAAR committee met today and discussed the illustrative examples (given in the draft guidelines)... some examples will be reduced, some will be combined", said a senior finance ministry official after the meeting.

Industry representatives have pitched for more clarity in the guidelines to ensure certainty to investments and suggested that the government also look at GAAR regime in globally and safeguards present there.

"It would be important if certain terms such as "substance" is defined in more objective manner and some tests such as expenditure test on the lines of Singapore treaty is incorporated in the domestic law" said

Punit Shah, partner - tax & regulatory services, KPMG. Shah, who had attended meeting chaired by finance secretary R S Gujral, said the ministry should provide more positive examples as to what is permitted and which doesn't attract GAAR provisions.

The draft guidelines has given 21 illustrative examples to clarify some of the key concerns of investors on applicability of GAAR on financial arrangements. The norms provide for a threshold limit for invocation of GAAR. They also clarified that the norms would apply to income accruing only after April 1, 2013.

As per the guidelines, GAAR will be invoked only in cases where foreign investors have opted to take the benefit of tax treaties entered into with India.

"Where an FII chooses to take a treaty benefit, GAAR provisions may be invoked in the case of the FII, but would not in any case be invoked in the case of the non-resident investors of the FII," the draft said.

The draft also illustrates that an FII having substantial presence in the country from the investments are routed would also not attract GAAR

The next meeting of the GAAR panel with stakeholders will be held on August 12 and 13. The government will finalise the guidelines only after due discussions with all stakeholders.

A jittery government decided to defer GAAR, introduced in the budget 2012-13, by a year to give relief to foreign investors after foreign institutional investors pulled out nearly $1 billion from India in April.