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Tax authorities invoke JAAR to deny treaty benefits to Mauritius-based funds

Economic Times  

The tax authorities have invoked the Judicial Anti-Avoidance Rule (JAAR) to deny treaty benefits to multiple Mauritius-based funds regarding the sale of "grandfathered shares". These shares refer to securities acquired before 1 April 2017, which were previously exempt from capital gains tax under the amended India-Mauritius tax treaty.JAAR is derived from judicial pronouncements and common law, which allows authorities to challenge structures perceived as artificial arrangements or sham deals intended to avoid taxes. The Central Board of Direct Taxes (CBDT) issued a notification earlier this year stating that earnings from the transfer of grandfathered shares would not be subject to the General Anti-Avoidance Rules (GAAR).However, the recent application of JAAR has created uncertainty for foreign portfolio investors and private equity funds. Tax practitioners note that while statutory protections exist against GAAR, there is no similar explicit protection for treaty entitlement when examined under JAAR.At least three foreign investors have reportedly received draft assessment orders citing the invocation of JAAR, marking an unforeseen shift in the tax department's approach toward legacy investments.