GAAR deferment: Govt going all out to please FIIs

Santosh Nair
Moneycontrol.com

The Shome Committee report on General Anti-Avoidance Rule gives a feeling that the government is almost bending backward to pacify foreign institutional investors. Parthasarathi Shome, the head of the panel, has said (in media interviews) there was no pressure on him to defer the controversial tax proposals that had got overseas investors worked up. Yet, a three-year deferment of the rules means the onus of implementing them will be on the party that comes to power after the 2014 general election. The continuous dilution of the proposals since May has both undermined the government’s authority as well as exposed the rift within UPA’s ranks. Former finance minister Pranab Mukherjee may have got his timing wrong, but there is no denying that stringent tax evasion rules are as important as attractive foreign capital flows. Some back tracking on GAAR was inevitable, as a sharp drop in foreign capital would have aggravated India’s already precarious current account deficit (CAD) situation. In its report on the outlook for the economy, the Prime Minister’s Economic Advisory Council has estimated that foreign capital flows this financial year will more than make up for the current account deficit. Clearly, you can’t antagonize foreign investors and then expect them to invest in India. So when the finance ministry announced in May that GAAR was being deferred by a year and the onus of proving evasion would be on the tax department (as against on the assessee earlier), that was still a dignified retreat. But a deferment of three years is as good as burying GAAR. The Shome Committee’s recommendation that capital gains tax on listed securities be abolished is an interesting suggestion. That is because there will be no longer a need for foreign investors to come in through the Mauritius-registered investment vehicles, most of which have been set up for the sole purpose of evading tax. But implementing the proposal means the government will have top forego a decent chunk of tax collection. Shome panel recommendations on GAAR: Key points The government’s efforts to placate foreign institutional investors are commendable. But one only wishes that it comes out with some solid measures to channelize domestic liquidity into capital markets, at the earliest. The response to quality initial public offerings gives a fairly good indication of domestic capital that is sloshing around. The government is aware that a sizeable chunk of domestic savings is flowing into real estate and gold, but has done little by way of policies to remedy the situation. Yet, it wants to give an impression that it is doing its bit for the capital market by coming out with poorly thought out schemes like Rajiv Gandhi Equity Savings Scheme. The measures announced by capital market regulator Sebi last month for mutual funds and the primary market are mostly of an incremental nature, rather being game-changers. Given India’s ambitious targets for infrastructure investments, a deep and vibrant corporate bond market is badly needed, as it would address the twin issues of tap domestic liquidity as well as helping corporates borrow long term funds at reasonable rates. But there has been little progress on this front.