New Delhi, May 7: The government today deferred the implementation of the rules against tax evasion by a year, cheering foreign investors who have been hammering stocks since these rules were announced in the budget.

“To provide more time to both the taxpayer and tax administration, to address all related issues, I propose to defer the applicability of GAAR (general anti-avoidance rule) provisions,” finance minister Pranab Mukherjee told the lower house of Parliament today.

However, Mukherjee did not appear to give any respite to Britain’s Vodafone, which the government wants to tax for the acquisition of the mobile operations of Hutchison Whampoa in 2007.

GAAR allows tax authorities to declare any business deal to be an “impermissible avoidance arrangement” if part or whole of the deal has been crafted with the intention of obtaining “tax benefits”.

Spooked by the tax provision, foreign institutional investors had pulled out more than Rs 1,000 crore from equity markets in the last month.

The government also decided to make some significant changes to GAAR: first the onus of proof of tax evasion will lie with the tax authorities and not with overseas investors; second, the proposed panel to review the provisions will have an independent member besides tax and judicial officers.

Finally, tax payers can approach the authority for advance ruling to ascertain whether a particular arrangement will fall under GAAR.

Officials said the criterion to claim residency status in tax havens would also be part of the review of GAAR. Fears that residency status would be challenged forced many PE firms into panic selling and to shift operations from Mauritius to Singapore.

Last month, top North Block officials had met the largest foreign institutional investors (FIIs), including Morgan Stanley, JP Morgan, CLSA and Goldman Sachs, to convince them that the tax proposals are not targeted at investors with a “substantial commercial presence” in Mauritius. However, this had not cut much ice.

“GAAR, thankfully, has been deferred by one year. However, a fundamental issue that still needs to be addressed is the trigger of GAAR itself — the draft proposal contemplates the trigger where one of the main purposes is to obtain tax benefit. Given that ‘tax benefit’ is worded unreasonably widely, one hopes that this issue will also be addressed,” Ketan Dalal, tax analyst with PwC India, said.

Mukherjee also said a move to amend income tax laws retrospectively would not override the provisions of the double taxation avoidance agreements India has signed with 82 countries, including Mauritius.

This is bad news for Vodafone, which had done the Hutchison deal in the Cayman Islands, which does not have any tax avoidance treaty with India.

The finance minister had proposed the amendments in the budget after the Supreme Court had ruled in January that the government had no jurisdiction to tax the Vodafone-Hutchison deal.

However, the rule would not be applicable to cases where the assessment orders have already been finalised.

“I have asked the Central Board of Direct Taxes to issue a policy circular to clearly state this position after the passage of the Finance Bill,” Mukherjee said.