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Sigh of Relief on Tax Front

In an attempt to provide some respite to the investors and ensure a taxpayer-friendly approach in revenue collection, the Finance Minister of India has recently assured that the Income-Tax Authorities (“ITA”) will not recklessly implement the retrospective tax rules. The Government of India (“GoI”) has introduced retrospective amendments in the Income Tax Act, 1961 which empowers the ITA to tax the indirect transfer of shares when the underlying assets are located in India.

The GoI has now referred the issue of retrospective tax rules to the committee headed by Mr. Parthasarathi Shome, (the “Shome Committee”). Earlier, the Shome Committee had recommended that the General Anti Avoidance Rules (“GAAR”) be deferred for three years. GAAR, giving ITA powers to scrutinize any transaction that they feel was structured to evade taxes, was introduced in the Finance Act, 2012 to come into effect from April 1, 2013.

Finance Minister has further stated that the implementation of GAAR provisions and the retrospective tax rules would be subject to the final report of the Shome Committee, which is expected by the end of September, 2012.

GAAR provisions and the retrospective tax rules have drawn sharp criticism from all spheres, since its introduction. The recent statements by the Finance Minister appear to be GoI’s effort to perk up the investors who have been apprehensive about the repercussions of implementation of the GAAR provisions and retrospective tax rules.