Foreign investors calmed by Chidu's 'rollback' on GAAR

New York: Finance Minister P Chidambaram’s words this week came as a small relief for investors rattled by Pranab Mukherjee’s controversial tax proposals that have discouraged foreign investors from sending money India’s way. Chidambaram stated unambiguously on Monday that India’s tax regime will have a “non-adversarial” approach.

Former finance minister Mukherjee’s plan, outlined in his March 16 budget, to tax international mergers that exchange Indian assets, had empowered the government to demand up to Rs 40,000 crore in taxes from at least 20 companies. Of course, everyone expected the most visible and immediate target to be Vodafone, which could end up paying upwards of $2.2 billion in taxes on a deal it struck offshore to enter India in 2007 through its $11 billion acquisition of the Indian assets of Hutchison Telecom.

[caption id=“attachment_441929” align=“alignleft” width=“380”]  P Chidambaram’s voice of reason has relieved foreign investors. PTI[/caption]

In a break from Mukherjee, Chidambaram said he would consider the suggestions of the Shome Committee set up to review both the “Voda” tax and the mildly sinister-sounding GAAR or General Anti-Avoidance Rule.

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Chidambaram said income-tax officials would consider the committee’s recommendations along with previous court decisions before deciding whether to issue a tax demand to Vodafone.

“They (tax officials) and are not going to act rashly. These are not small amounts on which you can take a rash decision,” Chidambaram demurred.

As finance minister from 2004 to 2008, Chidambaram presided over the boom years. But this time round, things are very different, with the head winds for the Indian economy getting stronger. In a warning sign, US investment house Morgan Stanley cut India’s economic growth forecast to 5.1 percent on Monday, for the 2012-13 fiscal year, citing declining external demand, low private investment and pathetic government finances.

The whole India story was built around high-octane growth. Now that growth is sputtering, investors both Indian and foreign, are generally holding on to their Indian investments hoping for a rebound or looking for greener pastures. In a world awash with liquidity, there are many other places to fish and investors have been gravitating to China, Korea, Singapore and Brazil, which have put out the welcome mat.

In a bid to improve India’s investment climate, Chidambaram is now likely to rely on the recommendations made by the Shome Committee and delay the tax clampdown. The GAAR tax rule, outlined by Mukherjee in March, rattled foreign investors as it raised concerns that the tax crackdown with retrospective effect would indiscriminately apply to their holdings of stocks and bonds. Global funds turned net sellers of Indian stocks in April and May after the tax proposals, prompting Mukherjee to delay the implementation of GARR to April 2013.

Now the four-member tax committee, headed by Parthasarthi Shome, has suggested delaying its implementation to 2017. Investors are probably counting on the retrospective tax provisions dying a natural death by then. The panel also said that GAAR, which is aimed at fighting tax evasion, should not be used to override double taxation treaties that have anti-tax avoidance provisions, such as the ones India has inked with Mauritius and Singapore.

The US media hailed the report and Chidambaram’s willingness to defer GARR by three years to create a congenial investment climate.

“In a rare bit of good news for foreign investors eyeing the Indian market, over the weekend an expert panel recommended that plans to crack down on most transactions and treaties that so far enjoyed some tax exemption be deferred for three years,” said The Wall Street Journal.

“Explaining that tax officers need intensive training before these rules can be implemented, the draft report also noted that they should be seen more as an instrument to deter tax avoidance, rather than to generate revenues,” added the Journal.