India postpones GAAR after investor outcry
08 May 2012
The General Anti-Avoidance Rule (GAAR)
introduced in India's 2012 federal budget is being deferred by a
year.
When it was announced in March, the GAAR was
intended to have immediate, and indeed retrospective, effect.
However the news provoked a chorus of criticism from international
investors and foreign governments, and weakened equity values on
India's financial markets. Several private equity firms also
indicated they might move their operations to Singapore. Official
figures show that net portfolio investment inflows into India of
USD13 billion in January and February turned into a net outflow of
USD540 million in March and April, just after the budget
announcement.
Finance Minister Pranab Mukherjee yesterday
told India's parliament (Lok Sabha) that the rule would not now
come into effect until 1 April 2013. The reason, he said, was ‘to
provide more time to both the taxpayer and tax administration, and
to address all related issues’.
Under GAAR, business transactions will not be
allowed tax relief if they are undertaken purely to obtain a ‘tax
benefit’. This is likely to be aimed especially at round-tripping -
the process whereby Indian corporate investors place funds in
Mauritius companies, which then invests the money in business
ventures in India. Such investments are free of Capital Gains Tax
(CGT) under the India-Mauritius double taxation treaty.
Mukherjee reassured investors that it will be
up to the tax authorities to prove intent to avoid tax. Moreover,
investors will be able to obtain advance clearance that their
transactions will not fall foul of the GAAR.
But when the GAAR does finally come into force
next April, it will retain its retrospective action. This means
that its principal target, Vodafone, is still vulnerable to a
possible CGT charge of billions of dollars on the 2007 acquisition
of Hutchison's India subsidiary. Earlier this year India's Supreme
Court ruled that Vodafone need not pay CGT on the deal because it
was conducted through a Cayman Islands company.
Mukherjee did however give an assurance that
retrospection would not be applied to disputes where the assessment
orders have been finalised.
• Mukherjee also announced that CGT on the
sale of unlisted securities by private equity investors will be cut
from 20 to 10 per cent, the same level as for foreign institutional
investors.
Sources
Economic Times of India
Calcutta Telegraph
Times of India
Reuters
Indian Express
Asianet
Economic Times (2)