Amidst fears that FIIs may be taxed for short-term capital gains in stock markets, the government, on Tuesday, said it will examine and modify the General Anti-Avoidance Rules (GAAR), if required.

“I will examine and modify GAAR as and when required. This is essential for anti-avoidance,” Mukherjee said in Parliament on Tuesday.

In his budget for 2012-13, Finance Minister Pranab Mukherjee had said that the government wanted to introduce GAAR in order to “counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel”.

The Securities and Exchange Board of India (Sebi) Chairman U K Sinha had, on Monday, said that the government “is going to have a new look at tax avoidance, so they they are going to work in that way”. The fear of GAAR had spooked stock markets on Monday on concerns that all short-term capital gains made by FII and P-Note investments would be taxed. But Sensex recovered on Tuesday.

Meanwhile, Finance Ministry sources seeking to allay fears that Participatory Notes, an instrument through which FIIs unregistered with Sebi invest in stock markets, said that the I-T department will have to first prove the intention of avoidance before making GAAR applicable.

“GAAR is not created to target any class of financial instruments. The onus of proving tax avoidance lies mainly with the government,” sources said.