Pranab soothes frayed FII nerves, defers tax avoidance rules by a year

Taking the sting out of certain controversial budget proposals, the Finance Minister, Mr Pranab Mukherjee, today deferred the implementation of anti tax avoidance measures by one year.

The General Anti Avoidance Rules (GAAR), which was to come into effect from April 1 this year, will now apply to incomes of financial year 2013-14 and subsequent years, Mr Mukherjee said while moving the Finance Bill 2012 for consideration in Lok Sabha today.

The anti tax avoidance measures, as fashioned in Budget 2012-13, had made many foreign investors jittery as it could override the treaty benefits and also the onus of proof of there being no tax avoidance was entirely on the taxpayer.

Changes announced

Mr Mukherjee has now softened the blow of GAAR by announcing changes to the proposed regime.

The Government will remove the onus of proof entirely from the taxpayer to the revenue department before any action can be initiated under GAAR, he said.

Advance ruling

Taxpayers, both residents and non-residents, will be able to avail themselves of the facility of advance rulings, Mr Mukherjee announced.

Simply put, they can approach the advance ruling authority and check whether their proposed arrangements (corporate structures) will be permissible under the GAAR provisions or not. If it fails the GAAR provisions, then there is a risk of such transactions getting taxed in India.

To provide greater clarity and certainty in the matters relating to GAAR, Mr Mukherjee also announced that a committee has been constituted under the chairmanship of Director General of International Taxation to suggest safeguards so that the provisions are not applied indiscriminately.

This committee will submit report by end May, he said.

Long-term capital gains tax

Meanwhile, there is some good news for private equity investors and non-residents. This is because Mr Mukherjee has now lowered the tax rate on the long-term capital gains from the sale of unlisted securities from 20 per cent to 10 per cent.

This change would bring such investors on par with foreign institutional investors (FIIs) who are currently subjected to 10 per cent tax rate on the sale of unlisted securities.

To provide further depth to the capital markets through listing of companies, Mr Mukherjee has now extended the benefit of tax exemption on long-term capital gains to the sale of unlisted securities in an initial public offering.

On such sale of unlisted securities, a securities transaction tax of 0.2 per cent will be levied, he said.

Good news for angel investors

Angel investors who invest in start-ups too have some good news coming their way. Mr Mukherjee said that an enabling provision would be provided in income-tax law to exempt certain notified class of investors from the applicability of a budget proposal on closely held companies.

The Finance Bill 2012 had proposed that any consideration received by closely held company in excess of the fair market value of its shares would be taxable. This proposal had raised concerns among angel investors who invest in start-up companies.

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