The finance ministry may defer the implementation of the controversial General Anti Avoidance Rule by a year, as investors have demanded more time for compliance.
"There is a strong demand from investors to defer GAAR. We are trying to address their concerns," said a finance ministry official, who did not wish to be identified.
The official denied the introduction of any grandfathering provisions under GAAR, but did not rule out the possibility of deferment.
The government will also specify a threshold in GAAR to determine the tax amount above which the rule could be invoked.
The ministry is planning a high threshold so that small investors, salaried taxpayers and individuals are exempted. The threshold may be around Rs 10-15 crore (Rs 100-150 million), lower than industry expectations.
If GAAR is implemented from April 2013, it will give time to both the investors and the tax authorities to adjust to the system.
The recommendations on the implementation date will be made by a panel framing the rules headed by the Director General of International Taxation.
The final call will be taken by Finance Minister Pranab Mukherjee and stated in his reply to the Finance Bill, expected to be taken up in the Lok Sabha on May 7.
GAAR is a part of the Direct Taxes Code expected to come from 2013-14.
However, GAAR was proposed in the Budget for 2012-13 itself. If deferred, it will coincide with the expected time frame for the DTC's introduction.
Though the government had clarified that GAAR provisions would apply from April 2012, investors feared capital gains to them on investments made last year could come under the rule.
GAAR is not expected to come into force with retrospective effect unlike amendments to the Income Tax Act.
Investors apprehended GAAR applying to shares purchased before April 1, 2012
"There is some amount of retrospectiveness in GAAR. Even if a foreign institutional investor bought shares before April 2012 but sells this fiscal, he could come under GAAR if he remained invested for fewer than 365 days," said a tax expert.
Long-term capital gains on equity investments of more than a year are exempted from capital gains tax.
GAAR would mainly hit FIIs coming from the Mauritius route, as they don't pay any capital gains tax at the moment while domestic investors pay tax on short-term gains.
Under the Double Taxation Avoidance Agreement between India and Mauritius, investors coming from Mauritius are required to pay tax only in Mauritius.
But, since there is no capital gains tax in Switzerland they don't pay tax anywhere.
The finance ministry has clarified that if the investor pays short-term capital gains tax, GAAR would not be invoked.
But investors worry that they had not taken this tax liability into account while making investments through Mauritius.
The treaty was originally meant to benefit the people of Mauritius but investors from various countries have started routing their investments into India through the tax haven.
About 40 per cent of FIIs flows into India are from the island nation.
To address this issue, the government proposed GAAR in Finance Bill 2012.
The ministry is also expected to dilute some GAAR provisions to allay fears of investors about the excessive powers to the taxman under the regime.
The provisions may be worded in a manner that the onus to prove tax avoidance is on the tax officials as well and not only on the taxpayer as proposed in the Budget.
The ministry may also consider suggestions to include people other than income tax officials in the approving panel for GAAR.