Whew! Salary earners can breathe a sigh of relief now. It seems the government will not be coming at you with a tax axe to hack away your earnings.
According to a report in The Economic Times, the government could tweak the dreaded General Anti-Avoidance Rules (GAAR) to exempt small firms and individuals and stretch out implementation of its proposals over several months. Tax-saving transactions of less than Rs 15 crore may be kept out of the ambit of the new regime, the report said. GAAR itself may only be introduced in the next financial year (starting April 2013) or much later in this financial year.
“There are many options on the table that are being considered. We are looking at specifying a threshold to ensure that small firms and investors don’t need to worry,” a finance ministry official was quoted as saying by the newspaper.
Thank goodness for that. Earlier media reports suggested that salary earners could also come under the scanner if tax authorities decided that pay packages had been designed to reduce tax.
A relook at these proposals has been on the top of the wish list for investors, especially foreign. Foreign investors routing their operations via Mauritius to take advantage of a tax treaty have been especially rattled by GAAR because it is likely to penalise them for structuring their operations to ‘avoid tax’.
It’s a battle India can ill-afford at the moment, especially given the sluggish pace of the economy and growing need for foreign investments. Earlier this week, ratings agency Standard and Poor’s lowered India’s longer-term sovereign rating to negative from stable citing fears of a persistent slowdown, a widening current account deficit, the government’s huge fiscal deficit and lack of progress on economic reforms.
GAAR and a controversial proposal to tax overseas deals involving Indian assets retrospectively going back to 1962 are not making things any easier. According to a Wall Street Journal report, FII (foreign institutional investor) flows are already drying up. FII equity inflows total just $171.8 million, down from more than $5 billion in February. The rupee is also twitching nervously, tumbling to a 15-month low against the US dollar on Tuesday.
Speaking to CNBC TV18 on Thursday, Adrian Mowat, chief Asian and emerging market strategist at JP Morgan and Chase Co, summed up the fears of foreign investors perfectly: “The problem with GAAR is not GAAR itself; it’s the retrospective nature of the way the legislation is expressed at the moment. So, when I start to think about investing in countries, if I have got a country where there is a precedent for retrospective change of the terms of investment, then that will make me more circumspect about investing in that country.
“We need to keep on coming back to the fact that unfortunately India does run a current account deficit. It does make you reliant on other people’s savings and those savings would like to be respected ….”
Will the government finally opt to do that?