The government is not keen to provide a transition period in implementing the General Anti-Avoidance Rules (GAAR) that are scheduled to kick in from April 1, 2017, in contrast to the relief being provided to Mauritius and Singapore-based investors whose capital gains on Indian shares will now be taxed by India from next year.
The amended tax treaty with Mauritius provides a two-year transitional phase when the capital gains will be taxed by India at a concessional rate of 50 per cent of the domestic tax rate. For listed shares, short-term capital gains in India are taxed at 15 per cent, while there is no tax on long term capital gains. Such a concession or a transition phase will not be provided during implementation of GAAR.
“(In) GAAR, there is no question of transition, GAAR will come, but GAAR explanatory notes can be given so that there is no unnecessary undue harassment to people. So people are welcome to ask us more questions. We can explain to them,” revenue secretary Hasmukh Adhia said when asked whether the government will provide transition period while implementing GAAR.
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The government will soon come out with details on GAAR to ensure a smooth roll out of these rules from April next year. “As early as possible we will start putting out guidance notes (on GAAR). We will hold some kind of consultations with the investors and all,” the secretary said.
GAAR is intended to check tax avoidance for investments by entities based mainly in overseas tax havens. In the Budget for 2016-17, finance minister Arun Jaitley had said that GAAR will be implemented from April 1, 2017. While deferring implementation by two years in the last year’s Budget, Jaitley had announced that when implemented, these rules will apply prospectively to investments made on or after April 1, 2017.
Adhia said that the changes in the tax treaty with Mauritius is a step towards preparing investors towards seamless roll out of these anti-avoidance rules. He said GAAR will be a reality now and the government is “determined” to implement these with least disruption.
Post implementation of GAAR, the government will get the right to tax capital gains of investors coming in India through other treaty countries such as Netherlands and Cyprus. This will completely plug the key loophole that has for years resulted in abuse of double taxation avoidance treaties with other countries.
First announced by then finance minister Pranab Mukherjee in FY13 Budget, implementation of GAAR has been deferred thrice, first to April 2014, then to April 2015, and finally finally to April 2017.
The stock market tanked a couple of days after announcement of GAAR in 2012, when the government sought to levy GAAR retrospectively. After the Budget announcement on March 16, 2012, BSE Sensex had fell roughly by 500 points or 2.71 per cent to 17196 points in the next five trading days.
Unlike previously, when these rules were announced abruptly and with retrospective effect, spooking markets, the government this time has already started meeting investors to prepare them for a smooth roll out. Minister of State for Finance Jayant Sinha and senior officials of the revenue department have met foreign portfolio investors to understand their concerns in this regard.
The finance ministry does not expect any abrupt capital flight out of India after these rules are implemented.
Adhia said the government will try to clear investors doubts. “They (FPIs) are want us to clarify certain situations whether in which GAAR will apply or not. They have given us some questions, we will reply to them and put it in public domain so that everybody is benefited. So whatever are the fears in the minds of FIIs we will try to clarify so that they know in advance before investing,” Adhia said, when asked about what feedback did the government get from meeting with foreign investors.