The draft rules that have been put up for discussion say the investors of foreign institutional investors will not be covered attract GAAR under any case. Beside, the rule will apply only to cases above a certain monetary threshold, which has not been spelled out in the draft.
"Where an FII chooses to take a treaty benefit, GAAR provisions may be invoked in the case of the FII, but would not in any case be invoked in the case of the non-resident investors of the FII," the draft circular says.
P notes are instruments that are used by foreign institutional investors to investment in India, through tax saving haven like Mauritius. There were fears that Pranab Mukerjee's budget which had GAAR provisions would bring P-notes under the tax ambit.
The present clarifications comes as a huge relief to foreign funds who have been major investors in Indian equities during the year. The Income tax department has stated that the GAAR rules will apply only to income earned after April 1, 2013.