RBI to introduce ‘Regulatory GAAR’ | Economic Times

Some of the largest Indian companies, startups and multinationals with an India presence have put their outbound investment, fundraising and restructuring plans on hold as the Reserve Bank of India (RBI) looks to introduce fresh regulations around “round tripping.”The central bank is looking to tweak the existing regulations and has come up with draft rules around round tripping. While some experts claim that the new regulations will only create more complications around an already complicated framework, others are hopeful that the fresh regulations could help some companies get clarity. RBI in the draft rules has said that any investment made outside India in an entity, which in turn invests in India, will be treated as round tripping if the purpose is to escape tax. This is exactly the same definition and rationale used by the tax department under GAAR (general anti avoidance rule) — which companies have been complaining is quite broad in its scope. 85283853“The proposed outbound regulations contain provisions similar to GAAR under tax regulations. It would prima facie appear that certain structures will now be permitted if there is no tax avoidance involved and will remove the current ambiguity surrounding these structures,” said Punit Shah, Partner, Dhruva Advisors, a tax advisory firm. Many industry trackers had earlier raised concerns around RBI’s stand on round tripping as it was creating problems for several Indian individuals over their investments in overseas funds and Indian companies looking to acquire foreign companies.The RBI and Enforcement Directorate (ED), the agency that probes money laundering, had started questioning several individuals who had invested in overseas private equity, venture capital or alternate investment funds (AIFs) which may have later invested in an Indian start-up, companies or assets. In some cases RBI had even questioned multinationals after they acquired global assets of another multinational that may have an outsourcing unit or presence in India. At least in one case a multinational had to split its India entity—that was mainly an outsourcing unit-- after a global acquisition to abide by domestic regulations. Some experts say that in every such situation an RBI go ahead was required, which was tough to come by. Many hope the draft regulations, with some minor tweaks, could just clear the air.