Implementing GAAR

It’s time to implement and the government is bang on…

There have been a lot of apprehensions among FIIs about the implementation of General Anti-Avoidance Rules (GAAR) effective April 01st this year. The fear is that it could lead to tax hounding and retrospective taxation of FIIs bringing back the fears of 2012. The truth is that this is the right time for the Indian government to implement GAAR and the FIIs should be pleased rather than complain about it…

Firstly, what exactly is GAAR? 

The idea of GAAR was first propounded in the year 2012 when Pranab Mukherjee was the finance minister. However, under popular pressure from global investors, the idea was shelved. GAAR is all about preventing global investors from using the FII route as purely a route to save tax on investments. The focus of the transaction will, therefore, shift more to the substance of the transaction rather than the form of the transactions. The example is cases like Vodafone and Cairn UK, where the entire transaction was structured through tax-haven based entities to escape the tax net. While the legal disputes are still on, there does not seem to be any early resolution in sight. With India renegotiating its treaties with key FII destinations like Mauritius, Cyprus and Singapore, it is the right time to look at implementing GAAR. This will turn the focus on India as a key investment destination rather than just the geography to save on taxes.

Why FIIs need not worry… 

Much of the apprehensions over GAAR are largely unfounded. Firstly, the government has already clarified that GAAR will be prospective and not retrospective. That means cases like Vodafone and Cairn will not be raked up purely on the strength of the GAAR. The government can go a step further and bring these cases to a closure before implementing GAAR on April 01st. That will boost the confidence of FIIs. Secondly, it is time India positioned herself as an attractive investment destination. With its high GDP growth and stable currency, India does not need tax breaks to attract FIIs. It is time India focused on genuine long term investors rather than round-trippers. 

What happens next?

In all probabilities, we expect the GAAR to be implemented effective April 01st this year. This is line with the treaties with Singapore, Mauritius and Cyprus that have been re-negotiated recently. There are quite a few factors favoring India. The annual FDI flows at over $55 billion are already the highest in the world. Secondly, domestic investors have proven to be a formidable force in Indian markets in the last 2 years. Lastly, it befits India’s status to position as an attractive destination rather than as a tax saving route. The time is now. As for FIIs, they really should not have much to complain about! ©

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