Tax laws need a lot more clarity
Finance minister Pranab Mukherjee did well to postpone implementation of the General Anti-Avoidance Rule (GAAR), which was a big irritant to foreign entities investing through the Mauritius route to avail of tax advantages. This move, and the rollback of some other Budget proposals, will definitely make life easier for the taxpayer. The government could, however, have avoided the embarrassment of having to roll back GAAR had it been more diligent while preparing its taxation proposals. The Union Budget is closely watched around the world for signals indicating the government’s thinking. The GAAR amendment, intended to curb black money, was badly needed, especially as the double taxation avoidance treaty with Mauritius was being misused by many people, and certainly not observed in its letter and spirit. Innumerable investors are just post-box addresses and the Indian government was the loser, while the Mauritius government and foreign investors had a win-win deal. Unfortunately, though, the GAAR proposal was thoughtlessly rushed through without even perusing how some other countries, such as Canada, Australia and South Africa, implemented similar schemes. It is believed that the government took its cue from South Africa, but failed to incorporate that country’s statutory safeguards.
The government of course needs revenue to support its expenditure, and one can only hope that bureaucrats in the finance ministry will use the year before GAAR comes into force to get more focused on their work, and produce well-considered, clear and unambiguous guidelines for its implementation. A number of queries have been raised by industry and the corporate sector, and the genuine ones deserve the government’s attention. Legitimate investors should not be treated as potential criminals or driven away from India out of fear of unpredictable action by the tax department. The government has a list provided by the Swiss authorities and some others — of Indians who have hidden accounts overseas. Why does it not take action against those on such lists? It would then not have to worry about unknown and perhaps dangerous entities behind the post-box addresses in Mauritius.
With corporate confidence at a new low, the government should ensure genuine investors are not harassed at the hands of tax officials who have been given wide powers to trigger a GAAR scrutiny. And GAAR is only one of several irritants that have reduced the flow of foreign funds to a trickle. The finance minister’s assurance that retrospective changes in tax laws would not be applied to cases already assessed is extremely vague — there are, after all, several stages of assessment. There has to be much greater clarity, and not through bureaucratic circulars and notifications, but through detailed, unambiguous guidelines. Only this will instil some confidence in the government’s sincerity.
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