Defer GAAR till 2016-17: Shome panel

Foreign investors have been offered long-term certainty in tax laws, including postponement of the controversial general anti-avoidance tax rules (GAAR) until at least 2016-17.

A committee set up by Prime Minister Manmohan Singh to examine all aspects of taxation of foreign investors has also recommended that tax certificates issued to them by the Mauritius government should be accepted at face value by Indian revenue authorities.

For investments from Singapore and elsewhere, the benefits offered by India through bilateral treaties should supersede domestic tax laws.

Over 44 per cent of foreign investment in India come through Mauritius and Singapore.

For domestic investors, the committee headed by economist Parthasarathi Shome has recommended that there should be no short term capital gains tax on investment in stock markets. 

The far-reaching suggestions are a response to the series of tax demands following a harsh rewrite of the Income-Tax Act by former finance minister Pranab Mukherjee in this year's budget. Foreign investment in India had collapsed.

The PM had promised to examine tax issues through the panel. Finance Minister P Chidambaram subsequently expanded the committee's scope to look into all aspects of foreign investment in India.

The draft report submitted by the committee today made a slew of recommendations to boost investor sentiment. It said that all existing investments involving a question of taxation of overseas entities should be 'grandfathered', meaning that their tax arrangements will not be re-opened for scrutiny.

While industry bodies like Ficci welcomed the report, Shyamal Mukherjee, executive director at PwC said a lot will depend on the government's implementation of the report. "The report tells the world this is how we aim to treat taxation of foreign investment in the long run," he said.

The panel suggested a high monetary threshold of Rs 3 crore of tax benefits for invoking GAAR. "GAAR is an extremely advanced instrument of tax administration — one of deterrence, rather than for revenue generation — for which intensive training of tax officers, who would specialize in the finer aspects of international taxation, is needed. Hence GAAR should be deferred for 3 years," the panel said.

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