GAAR: Is there a basic rethink?
In politics, if one wants to defer a decision or buy time, one forms a committee. It’s perhaps too early to tell if the four-member panel set up by Prime Minister Manmohan Singh to examine complaints by foreign institutional investors against the General Anti-Avoidance Rules follows this dictum, and is a continuation of the policy paralysis UPA-2 has been tagged with. Doubts arise as this comes soon after postponement of the decision on 2G spectrum. On the other hand the PM appears to have woken up to the huge irregularities and leakages in the flagship National Rural Employment Guarantee Scheme and asked Planning Commission deputy chairman Montek Singh Ahluwalia to look into the leaks and plug them.
The grievance of FIIs is against the provision in GAAR that denies tax benefits to those who misuse the double taxation avoidance treaty that India has with Mauritius. A number of FIIs who invest in the stock market via Mauritius are mere postbox addresses. They not only benefit through the returns from Indian stock markets, a weak rupee and a low tax regime in Mauritius — a triple bonanza — but they cause significant losses to the Indian tax authorities. This provision was introduced in the 2012-13 Union Budget presented by former finance minister Pranab Mukherjee as part of the battle against money laundering: black money entering the economy to be turned white. Following the threats of withdrawal of funds by FIIs, Mr Mukherjee set up a seven-member committee to look into their grievances. The draft guidelines which the committee produced have now been thrashed without any explanation by the PM, who is now also holding charge as finance minister, and a new four-member committee formed to look afresh at the FIIs’ grievances.
To the credit of the former finance minister and finance secretary, they had repeatedly assured FIIs that only those who misused the treaty would be affected by the provision, and even postponed its implementation till April 2013, giving time to those who had gone against the spirit and letter of the treaty to correct their positions. While the Prime Minister has not made his views on GAAR public, it is suggested that he is concerned about foreign investors being deterred by stringent tax laws. This is almost reminiscent of China’s Deng Xiaoping, who had once famously said he didn’t care whether the colour of the cat was black or white, as long as it could catch mice! Perhaps Dr Singh too is not queasy about the colour of the money as long as it shores up Indian markets. But if this causes a loss to the exchequer, perhaps it should matter — especially as our finances are already over the cliff.
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