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Mr.Gautam Mehra
(Executive Director, PwC),
Mr.Nehal D. Sampat
(Associate Director, PwC)
Substantial water has passed under the bridge since the insertion of GAAR
provisions was originally proposed. After the Expert Committee on GAAR
consulted various stake-holders and submitted its report to the Government a
year ago, the Finance Minister issued a statement in January 2013 setting-out
the decisions taken by the Government in relation to GAAR provisions. Some of
the announcements were incorporated in the statue by the Finance Act, 2013,
some others including procedural aspects have been considered under the
GAAR Rules notified last week and some remain yet to be clarified.
GAAR Rules
The income-tax law empowers the Revenue authorities to notify rules to administer its provisions. Section 101
of the Income-tax Act, 1961 (the Act) states that the GAAR provisions shall be applied in accordance with
such guidelines and subject to such conditions, as may be prescribed. Section 144BA of the Act dealing with
references to Commissioner/Approving Panel empowers the Central Board of Direct Taxes (CBDT) to make
rules for efficient functioning of the Approving Panel and expeditious disposal of GAAR references. Similarly,
section 295 of the Act empowers to the Board to make rules for matters specified in GAAR provisions.
Pursuant to the exercise of the above powers, the CBDT notified the GAAR Rules last week.
GAAR Rules: Whats in it for FIIs?
The Rules prescribe that GAAR provisions would not apply to a Foreign Institutional Investor (FII) who:(i) Is an assessee under the Act;
(ii) Has not taken benefit of an agreement referred to in section 90 or section 90A, as the case may be; and
(iii) Has invested in listed or unlisted securities with the prior permission of the competent authority in
accordance with the SEBI FII Regulations and such other applicable Regulations.
The term assessee has been defined vide section 2(7) of the Act to mean any person by whom any tax or
other sum of money is payable under the Act and in respect of whom proceedings have been initiated for
assessment of his income/loss/ refund due. It includes representative assessee and any person deemed to be
an assessee/assessee in default under the Act.
For the above purposes, the term FII has the same meaning as assigned in the Explanation to section
115AD of the Act. Under the said section, FIIs have been defined to mean such investors as the Central
Government may notify. FIIs/sub-accounts that are registered with the SEBI are automatically notified for the
purposes of section 115AD.
Thus, the Rules carve-out an exception from applicability of GAAR provisions for FIIs who have not claimed
treaty benefits or relief from double taxation in accordance with an agreement with specified territories. This is
in accordance with the draft guidelines on GAAR and the recommendations of the Expert Committee which
were accepted by the Finance Minister earlier this year.
The Rules also carve-out an exception for non-resident investors in relation to investments made by them by
way of offshore derivative instruments or otherwise, directly or indirectly, in a FII. In this context, the term
offshore derivative instrument has been assigned the same meaning as provided under the SEBI FII
Regulations. The SEBI FII Regulations define that term to mean any instrument issued overseas by a FII
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Conclusion
The notification of the GAAR Rules, well in advance before the GAAR provisions being effective, is a step in
the right direction. With such proactive-ness, one hopes that the following issues are clarified as well in due
course (these were discussed in the earlier reports of the Expert Committee/Finance Ministers statement):- Interplay between GAAR and SAAR; and
- Prescribing a "negative list" of transactions for non-applicability of GAAR provisions.
One also hopes that the larger issue for FIIs i.e. the potential impact of offshore transfer provisions on India
focussed funds, is clarified too in favour of offshore investors. FIIs may have a reason to celebrate then!
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