While the idea of the introduction of General Anti Avoidance Rules (GAAR) was mooted in the Direct Taxes Code (DTC) Bill, the Finance Act, 2012, fast forwarded the enactment of GAAR provisions into Income-Tax Act, 1961, and the same were set to come into force with effect from April 1, 2013. An expert committee (EC) constituted by the Prime Minister’s Office on July 13, 2012, to recommend GAAR guidelines submitted the final expert committee report (ECR) to the government on October 1, 2012, which was released on January 14, 2013, along with a press release containing a statement from the finance minster (FM) on the decisions taken by the government of India (GoI). The ECR has provided an illustrative list of transactions where GAAR will and won't be applicable. These illustrations seek to enunciate certain points of principle which, inter alia, provide guidance on when can it be said as to whether the main purpose of the arrangement is to avail a tax benefit.
Considering that GAAR is an advanced instrument of tax administration requiring awareness of its finer aspects and intensive training /specialisation, the EC has recommended that GAAR be deferred for three years and brought into force from April 1, 2016. The GoI has, in principle, accepted this recommendation but the provisions have been deferred only for two years and the same would be effective April 1, 2015.
Further, the EC has recommended that all investments existing on the date of the commencement of GAAR provisions be grandfathered. However, the FM has stated that only investments made before August 30, 2010, (being the date of introduction of DTC Bill, 2010, in the Lok Sabha) will be grandfathered even though sold post April 1, 2015.
This rather unique way of grandfathering could potentially expose the future effects/exits (made after April 1, 2015) from the investments made on or after August 20, 2010. While the private equity investments into India have generally dipped in the past two years or so, FII investments have been robust in 2012. Of these investment flows, it becomes important to consider the impact on investment flows from