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GAAR provisions to enter into force as from 1 April 2016 - 31/01/2013


Key recommendations of the Expert Committee Report

General Anti-Avoidance Rule (“GAAR‟) had been introduced by the Finance Act, 2012 to be effective as from 1 April 2014 (Please refer to our previous Operational Tax News in relation to India). An Expert Committee had been appointed to provide recommendations on the guidelines to be issued for its implementation.

Please find attached the International Tax Alert issued on 15 January 2013 by Deloitte India detailing the key elements of the Expert Committee Report and the key recommendations accepted by the Indian Finance Minister.

The Statement released by the Indian Finance Minister is only a declaration of intent which still has to be enacted in the Indian Income Tax Act through the Budget law to be submitted to the Indian Parliament as from 28 February 2013.

With regards to Luxembourg investment funds investing in India, the most relevant recommendations considered by the Indian Government are as follows:

  • GAAR provisions should come into force as from 1 April 2016 as against the current provision of 1 April 2014;
  • Investments made before 30 August 2010, (date of introduction of the Direct Taxes Code Bill 2010) should be grandfathered;
  • With regards to Luxembourg investment funds investing directly in India through the Foreign Institutional Investors (“FIIs”) regime; GAAR should not apply to transactions (subscriptions/redemptions) made by non-Indian resident investors in FIIs;
  • Tax on gains arising on transfer of securities, being equity shares or units of equity oriented mutual funds, which is subject to securities transaction tax (“STT”) should be abolished for both residents and non-residents.

The initial recommendation to increase the rate of STT, to make the proposal tax neutral, seems to have been dropped.

Such provisions, if enacted in the Indian Tax Code, would render direct FIIs investments in quoted securities fiscally attractive and may render the use of the Mauritius route less appealing.

It is expected that the upcoming budget for the year 2013 would bring more changes in the Indian Tax Act in relation to GAAR provisions.

Finally, in November 2012, Mauritius announced the establishment of new commercial substance requirements concerning Category 1 Global Business Companies. The new substance test to be introduced as from 2013 tax year should be met in order to obtain certificates of tax residence for the purpose of benefiting of the India/Mauritius double tax treaty. The new substance requirements test has however not yet been defined by the Mauritius legislation.

Luxembourg investment funds that are currently using the Mauritius route should analyse the impact of the above changes on their operations.

Should you have any queries regarding the above, please do not hesitate to contact us.

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