The Central Board of Direct Taxes (CBDT) has clarified that investments made in India before 1 April 2017 are outside the scope of the anti-abuse rule General Anti Avoidance Rules (GAAR), refining earlier language that had drawn criticism for ambiguity.
An official order issued on Wednesday stated that GAAR — which empowers tax authorities to deny tax benefits to transactions primarily aimed at tax avoidance — will not apply to such investments.
The move makes the carveout explicit, replacing earlier language that had been criticised as complex and open to interpretation.
Tiger Global context
Experts said the clarification is significant, particularly in light of the Supreme Court’s January ruling that through Mauritius entities was taxable in India, despite claims of grandfathering benefits for investments made prior to 1 April 2017.
Grandfathering refers to a legal provision that allows investments made before a specified cut-off date to continue enjoying the , even if the law changes later.
The rule change is largely clarificatory in nature and helps remove ambiguity around GAAR grandfathering, said Sandeep Sehgal, partner-Tax at AKM Global, a tax and consulting firm.
“By refining the language and expressly ring-fencing capital gains from investments made prior to 1 April 2017, it reinforces the original intent that such legacy investments should remain outside the ambit of GAAR,” said Sehgal.
The amendment does not alter the outcome of the Tiger Global case, which was driven by indirect transfer considerations and therefore, its applicability in the GAAR grandfathering context may be limited, he added.
However, it effectively resolves the interpretational uncertainty highlighted in that ruling on the interplay between GAAR and grandfathering where tax benefits arise post-2017, said Sehgal.
“This clarification provides much-needed certainty to investors while making sure that GAAR continues to apply to post-2017 arrangements,” he said.
Clearer grandfathering
Sandeepp Jhunjhunwala, M&A Tax Partner at Nangia Global Advisors, said a rule-based reading of the amendment suggests that the revised language explicitly excludes income arising from transfer of such investments from the ambit of GAAR.
This provides a clear and self-contained grandfathering protection, effectively placing capital gains on these shares beyond GAAR scrutiny, he added.
GAAR was introduced into the to prevent businesses from entering into complex arrangements lacking economic substance and designed primarily to avoid taxes. It empowers tax authorities to recharacterize such transactions and deny tax benefits where commercial substance is absent.