The Income Tax Department has removed income received from transfer of investments made before April 1, 2017, from the purview of ‘General Anti-Tax Avoidance Rules’ (GAAR). With this, the long standing concern regarding its retrospective implementation has been resolved. The Central Board of Direct Taxes (CBDT) has amended the Income Tax Rules, 2026, saying that any income earned or received by any person from transfer of investments made before April 1, 2017 will not come under GAAR.
no tax will be charged
Sandeep Sehgal, partner (tax), advisory firm AKM Global, said the amendment to Rule 128 of the Income Tax Rules, 2026 is mainly for clarification. This is helpful in removing ambiguity regarding the retrospective effect under GAAR. He said that this amendment effectively removes the interpretive uncertainty highlighted in that decision regarding the interplay between GAAR and grandfathering in case of tax benefits available after 2017. This clarification provides certainty to investors, which was necessary. It also ensures that GAAR continues to apply to post-2017 arrangements.
What is grandfathering?
Grandfathering is a provision under which the old rules remain applicable in current situations while the new rules apply in future cases, thereby exempting the current parties involved from the new rules. This ensures certainty, protects against unexpected compliance expenses and maintains consistency in policies, investments or user pricing. GAAR, announced in the Union Budget for the financial year 2012-13, was aimed at curbing tax evasion by foreign investors. Its goal was to prevent tax evasion by entities that participate in arrangements that are not eligible. However, controversy also arose regarding this proposal. Investors feared that this could lead to unnecessary harassment by tax officials.
The rules came into effect in 2017
The GAAR rules were finally implemented on April 1, 2017. It also provided that any transaction, arrangement or tax benefit related to investments made before April 1, 2017 will be kept with retrospective effect. Rajat Mohan, managing partner, AMRG Global, said the CBDT has now clearly stated that income arising from transfer of investments made before April 1, 2017, will be kept out of the purview of GAAR. He said that with this the government has removed a long standing concern of the industry regarding retrospective implementation.