In a bid to provide clarity to investors, the Finance Ministry has said the General Anti-Avoidance Rules (GAAR) will not apply to any income earned or received from transfer of investments before April 1, 2017.

The move will bring the anti-abuse rules that will be applicable from assessment year 2018-19 in line with the reworked India and Mauritius Double Taxation Avoidance Agreement that will grandfather all investments till April next year. The Finance Ministry had promised to issue a circular clarifying the issue.

To this end, the Central Board of Direct Taxes (CBDT) has also amended Rule 10 of the Income Tax Rules, 1962. However, it has said GAAR will apply to any arrangement, irrespective of its date, if there has been any tax benefit from it prior to April 1, 2017.

Investors have been worried about the impact of GAAR on investments routed through Mauritius, as the new tax treaty allows India to impose capital gains tax on shares sold in Indian companies post-April 2017.

The CBDT also plans to bring in a similar provision in the tax avoidance pact with Singapore.

Welcoming the changes, tax experts said GAAR provisions on arrangements before April 2017 would be used only on actual incidents of tax avoidance, not on genuine business arrangements.

“This provision implies a certain degree of retroactive operation as it covers arrangements made before the cut-off date of April 1, 2017…It would be preferable if the CBDT were to give specific guidance as to when this provision will get triggered,” said Rahul Jain, Partner, Nangia & Co.  

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