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Jul 16, 2012, 08.18 AM IST
The government's latest tune on the much dreaded General Anti-Avoidance Rule (GAAR) will be music to foreign institutional investors' ears.
The government’s latest tune on the much dreaded General Anti-Avoidance Rule (GAAR) will be music to foreign institutional investors’ ears. On Friday, Prime Minister Manmohan Singh set up an expert panel to finalise the law, and the market and investor community is interpreting this as a clear sign that the final Bill may be a considerably watered down version compared to what was originally proposed by the finance ministry when Pranab Mukherjee was in charge.
The draft guidelines on GAAR, proposed by the finance ministry and made public the week before last, was anyway a toned down version of the original proposition. The proposals to make the law prospective, and the shifting of onus of proving tax evasion onto the taxman instead of the investor, were cheered by the stock market. But foreign investors are still not satisfied, and the government appears willing to oblige even more. Should the GAAR provisions be diluted further, it would certainly boost market sentiment in the short term, but it would be a missed opportunity for tightening controls against tax evasion. At least where portfolio inflows are concerned, there is enough evidence that liberal investment policies alone are not enough to attract foreign investors. The market rallied from October 2007 to January 2008 despite the Sebi restrictions on participatory notes and it sank between October 2008 and February 2009, despite the restrictions being reversed.
There have been enough indications that the Prime Minister and his ex-finance minister did not see eye to eye on many issues. And some of the remarks and action ever since taking charge of the finance ministry appear to be a deliberate attempt to discredit his predecessor. The government has chosen the wrong time to go after foreign investors evading tax. The country badly needs dollars to plug its gaping current deficit which is now at a record high. And bearish market conditions means that foreign capital flows have anyway slowed down. The last thing to do would be scare away investors by tightening tax laws at this juncture.
And yet, there is no denying there is a serious need to fix loopholes that are aiding tax evasion and money laundering on a massive scale. Having decided to take on the white collar criminals, the government should have stuck to its guns, even if it meant some pain in the short term. An ideal solution would have been to free-up bottlenecks in some other policy areas to minimize the fall-out of GAAR.
Also, should the new finance minister reverse some of his predecessor’s decisions, it will only reinforce foreign investors long-standing concerns about lack of consistency in policy making. Political analysts say the PM’s renewed vigor has more to do with a changed power equation within the Congress, with the balance now tilted in his favour. But what if the equation were to change again in the near future?
HOLLOWNESS OF THE RECENT RALLY
Here is an important indicator why the recent rally may not be something to get excited about. A report in The Economic Times quoting a senior Income-Tax official says Securities Transaction Tax (STT) collection so far this financial year (April 1 till date) is down 15%. This, when benchmark equity indices have fallen barely 1% during the same period. Lower STT collection means lower trading volumes, which in turn means that not enough players are participating in the action though the market has rallied around 10% from its lows in May. It is somewhat like the Mumbai real estate market. Prices of apartments remain high even though realty firms are struggling to find buyers. A persistent decline in trading volumes over the last few months, and no signs of improvement, means that it is a matter of time before some of the mid-sized brokerage firms throw in the towel.
MORE POWER TO SHAREHOLDERS
This is something that has not made headlines in most business dailies, but is nevertheless an important step towards shareholder empowerment. The Securities and Exchange Board of India has made it mandatory for the top 500 listed companies to provide e-voting facility to their shareholders from October 1 this year. Shareholders will be able to vote online on resolutions transacted through postal ballot. But e-voting is still not applicable for resolutions in Annual General Meetings, Extraordinary General Meetings and court-convened shareholder meetings. This would require changes to the Companies Bill for it to be made legal, and testing the robustness of the system to ensure that it is fool-proof. In the interim, companies will most likely keep controversial resolutions out of the ambit of postal ballot, to avoid shareholder resistance. So there will be meetings held on Sundays, in remote locations, and many contentious resolutions will be passed by show-of-hands.
GLASS HALF FULL OR HALF EMPTY?
Some respite on the domestic macro front, at last. Preliminary data shows trade deficit (difference between exports and imports) for June having slipped to a 15-month low of USD 10.3. This was helped by a 13.5% decline - the steepest in 32 months - in imports to USD 35.4 billion. This points to slowing demand within the economy, and could help ease inflation in the coming months. But there is no telling if the slowdown could intensify further going forward. Also, exports for the quarter ended June have declined close to 2%, compared to the corresponding quarter last year. The commerce ministry’s export growth target for this financial year is 15%, and the given the gloom in the global economy, that goal may appear a bit ambitious. And weak export growth means that the RBI and the government will have to look elsewhere for the extra dollars to bridge the current account deficit.
KEY RESULTS NEXT WEEK: Reliance Industries, Bajaj Auto, Hero Honda
Tags: General Anti-Avoidance Rule, Manmohan Singh, tax evasion, e-voting facility, Securities Transaction Tax
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