After weeks of protest by both foreign and Indian investors, FM Pranab Mukherjee on 7^th May 2012 announced that the General Anti-Avoidance Rules (GAAR) will be applied from 2013-14 onwards, deferring its application by a year.

Speaking on amendments in the Finance Bill in parliament, Mukherjee also said the burden of proof will lie with the tax authorites and that the proposed retrospective amendment of income tax laws will not override tax break treaties.

“Deferment of GAAR is needed to bring about more clarity in guidelines and (put in place) the complete framework after stakeholder consultations to ensure its smooth implementation,” said Rahul Garg, leader (direct tax), PwC India to ET Bureau.

A deferment of GAAR can perk up sentiment in general, but the overall mood towards emerging markets is so weak there may not be a flood of investments, says Abheek Barua, chief economist, HDFC Bank. Under the GAAR regime, authorities can deny tax benefit to any arrangement that is entered into primarily to avoid tax. The rule will almost certainly tax foreign institutional investors that route portfolio investments into India through token operations in Mauritius with which India has a tax treaty.