Budget 2016: GAAR right on course, more clarity needed

MUMBAI: The finance minister stuck to the time frame on General Anti-Avoidance Rules ( GAAR) announced in his Budget speech last year and said it will be implemented from April 1, 2017.

Tax experts and investors, however, said that they were awaiting more clarity as uncertainty persists over the rules.

In his Budget for 2015-16, Arun Jaitley had announced that the implementation of GAAR would be deferred by two years. The rules allow the tax authorities to scrutinise all arrangements with retrospective effect in a transaction that is suspected to be aimed at avoiding tax.

Global investors are wary of GAAR over two counts – first, the wide powers that the provisions give to tax authorities, and second, the fact that the provisions override all tax treaties.

Many countries across the world follow GAAR. In India, the rules were announced in the Income Tax Act in 2012 by the then finance minister Pranab Mukherjee. The announcement had spooked global funds as it highlighted uncertainty in Indian tax laws and its implementation was deferred after a lot of hue and cry by investors.

But the finance minister’s announcement last year gave investors time to get used to the idea.

“Indian markets are prepared for GAAR starting 2017 as finance minister in the past had clearly stated the timeline. However, some market participants were building hope of GAAR being delayed further. The biggest concern currently is about FII outflows and, if they continue, then the authorities may be forced to reconsider the anti-tax avoidance regulation,” said UR Bhat, director at Dalton Capital.

Tax experts said they need more clarity on the guidelines and also a final time frame will help.

“The devil will be in the details. The government may need to issue detailed guidelines (including in relation to treaty benefits) to minimise confusion and uncertainty,” said Ketan Dalal, managing partner (west), PwC.