Working on transparent GAAR mechanism: Eco Secy Gopalan

Foreign institutional investors fretting over the General Anti-Avoidance Rule (GAAR) will have to wait till the second week of May to get a clear idea of what lies in store for them.

Speaking to CNBC-TV18, Economic Affairs Secretary R Gopalan said the specifics on GAAR will be notified on May 7-8, once the Finance Bill is passed in Parliament. While defending the government's stance on GAAR by saying that India was not the only country to have such a rule, Gopalan said that the government was working on an easy, transparent mechanism to implement GAAR. "We are working on an easy and transparent mechanism to implement GAAR, but more specifics will be notified once the Finance Bill is passed," he said. Though not in as many words, Gopalan repeated what Finance Minister Pranab Mukherjee has been saying all along: genuine FIIs have nothing to fear, it is only the tax evaders that will be targeted. Uncertainty over how GAAR will be implemented has caused a sharp drop in foreign capital flows into Indian equities since the Union Budget in mid-March. FIIs net bought Rs 8000 crore of shares in March, compared to Rs 25,000 crore in February. And they have been net sellers in April so far. The government has a legitimate reason for invoking GAAR. Misusing the Double Taxation Avoidance Agreement that India has signed with countries like Mauritius, many foreign investors route their investments into Indian equities through shell companies in these countries so that they don't have to pay capital gains tax. This loophole is widely exploited by resident Indian businessmen and politicians who bring back unaccounted money in foreign banks through shell investment companies. But the government's crackdown on tax evasion by foreign investors comes at a time when the country's current account deficit is at its highest in over two decades. A huge import bill, mainly due to soaring crude price, is sucking out dollars and there is not enough coming by way of foreign portfolio flows and foreign direct investment to fill this gap. That is where the government's resolve will be tested. On the issue of raising fuel prices, R Goplalan feels a hike in petrol prices is long overdue, especially if the fiscal deficit has to kept in check. "Containing fiscal deficit remains the government's top priority, and we aim at better targeting of subsidies to help cut the total bill," he said. In an environment of policy paralysis and slow growth, however, sentiment continues to remain poor and doubts persist over the government's ability to stick to its targets. For FY12, the government overshot the 4.9% target fiscal deficit by a huge margin, to finish off the year at 5.9%. However, the fiscal deficit not only takes a toll on general sentiment, but also affects India's credit rating. Ratings agency Standard & Poor's met top government officials last week to discuss steps taken to curb subsidies and address growth concerns. "We allayed their concerns related to deficit and growth, and I think most of their doubts were cleared. We are now awaiting their decision on the rating," said Gopalan. Disinvestment Debacle The government's disinvestment plan last year was a flop show. Instead of the targeted Rs 40,000 crore, only Rs 15,000 crore was added to the government's kitty. Due to this, Finance Minister Pranab Mukherjee pared down disinvestment target to Rs 30,000 crore for FY13. So as to ensure disinvestment plans don’t go down the same path, Gopalan says they have many methods this year around, which includes SUUTI, auctions and IPOs. "FY13 divestment plan will kick off in the first half itself," he added. Read on for the full interview.. _PAGEBREAK_ Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: How did the meeting with S&P officials end, were you able to convince them that things are on the mend and they do not need to put India on a ratings review? A: We had a very fruitful and useful discussion with them. We explained the basis and rationale for the numbers, the kind of decisions which we are going to take in the near future and a host of other policy issues. They were concerned, quite naturally, on the current account deficit and the fiscal deficit. We indicated to them how the fiscal deficit is being addressed, how the current account deficit isseus are also being addressed and what confidence is being created in the economy by the number of steps we have been taken. At the end of it, we are of the view that many of the doubts had been cleared and they were happy to a considerable extent. Obviously they also are talking to a number of other people, perhaps they will form their opinion later, but to me and my team we felt that it was a very good session and we are happy about it. Q: One of the concerns that you may not have been able to address adequately was perhaps the subsidy issue, because it’s baffling that there is no movement on oil prices at all and that’s a crucial plank of how you arrive at your subsidy target or your deficit target for FY13. What were you able to tell the S&P team on that front? A: We told them very clearly that we would like to keep the total overall subsidy at 2% of GDP from 2.4%, though numbers show 1.9% at this point in time. What we are able to tell them is that as far as the fertilizer numbers are concerned, we were quite clear as to how we are going to tackle it. On food also it was not an issue, but on petroleum side there was concern from them. We explained to them as to how this is going to pan out as we go along. Obviously if we have to keep the deficit as 2% of GDP, some measures are required to be taken and we gave them the feeling that it is possible. Lots of discussions are going on, consultations are going on and we explained to them the process we are likely to follow. But once again, as we had mentioned to them, these things have a way of panning out, these things have a way of rolling over as we go along. At the government level, there is a commitment to tackle this head on and we are very clear that if fiscal deficit numbers have to be maintained at 5.1%, which is very crucial for us, some of these steps are inevitable. Q: Can you to flesh out what exactly the plan might be with regards to oil subsidy, either in terms of how soon we can expect any word on petrol prices or on indications in the press now that perhaps a decision on diesel deregulation will be taken post the monsoon session? Is there any timeline in place over the course of this financial year on what to do with oil subsidy problem? A: There is a plan; I would rather say that different scenarios are being examined at this point in time. It could be a combination of a number of things, not necessarily diesel. You will find that apart from 30-40% which is used for genuine purposes, kerosene is being used for a variety of other purposes which does not deserve subsidy at all. You will also find on the food front cards which are floating around, some of them which do not deserve to get food grains at subsidized prices. The Aadhar platform highlights which these and it will go a long way in ensuring that subsidy on those are also reduced. We also have to take some decisions on how the petroleum subsidy, especially with regard to this, has to be tackled. A number of measures are being discussed, but it is too early to say. When the decisions are taken, all we are doing is working out the number of scenarios which can be achieved. A call will have to be taken and will be taken at appropriate time which the political executive will decide. Q: But recommendations and scenarios have already been worked out by The Kirit Parikh committee, which is why one wonders what exactly this tumbling block is. Would you say within the course of this calendar year a decision will be taken with regards to diesel and whether or not to re-deregulate petrol prices because what we get from the Oil marketing companies is that this has more or less become a controlled commodity again? A: As I mentioned to you the Kirit Parikh committee has made some recommendations but there are a number of ways in which these issues can be tackled. I would rather say that it’s a question of when we are going to take it. If 5.1% of fiscal deficit has to be maintained, a number of steps are required to be taken and will be taken because the government is very keen on containing the fiscal deficit and not allowing to go beyond the numbers which we have stated and on ensuring that the subsidy numbers are not going beyond what we have stated. Therefore, with all this determination, it is a question of what measures are required to be taken, which are on the anvil, but it’s too early for me to comment on them because a decision is required to be taken which will be taken. Once a decision is taken, you will come to know certainly. But what I want to convey to all the people is there is a determination that subsidies as a percentage of GDP has to be contained and if this determination is there, there is going to be a series of steps. Q: We have a very bad current account deficit situation, the rupee is going closer to 52 again. In such a scenario where we are quite dependent on global capital inflows, is it not in your interest to resolve this GAAR confusion as swiftly as you can? A: On the GAAR issue, the revenue secretary will be in a much better position to explain, but I would like to say that GAAR is something which is being done by quite a good number of countries, so it is not something which is strange. What is important to bear in mind is that we need to have the provisions in a manner which inspires confidence in the minds of everyone, including the tax authorities as well as the people who are subjected to it. The Finance Bill is likely to come up around 8th or 9th of May, so when that gets passed these rules will be notified. Number of concerns have been raised, discussions have been held and we are conscious of the fact that these rules should not upset investment flowing into the country. At the same time we also should be conscious of the fact that the tax treaties not be misused. Our intent is to ensure that genuine transactions take place through the tax treaties and not be that people take these routes for the purpose of making tax gain. While I say this, I am also conscious of the fact that it should be a regime where all people are comfortable, including the users and tax authorities. We are working out a system which will make it much easier and transparent. Many of the misapprehensions which have crept in will certainly be allayed when the rules are going to come up. Q: There have been interminable delays in many of the policies which were suppose to be cleared by now, which is FDI in many aspects of retail, airlines etc, and they keep getting postponed. Would you candidly concede that these things should be taken off the expectation radar for a lot of economic participants because the government is not in a political place to push ahead or are they still on the table for the government? A: These issues which you just outlined are very important and they are required for the economy. There are a number of consultations which have taken place on the multi brand retail and a lot of economic agents in this area have conveyed their feelings. The airlines issue is also very-very important. All I can tell you is that the government has been focusing very seriously in these two areas and it is very much in the radar, it is very much a part of government’s efforts to improve the sentiments. Q: I just want to focus on the government’s divestment programme as well. Have specific names been zeroed in on the next six months, because we heard that for some companies like BHEL the DHRP had been withdrawn? Also, is the leaning still toward IPO or will the preferred mode be the kind of auctions that you conducted for ONGC? A: The list of companies which have to be divested has already been indicated. One thing which we are vey conscious of is that we now have a number of methods through which divestment can be done, whether it was SUUTI or through other routes for which we have taken Cabinet approval. We have been able to now evolve a number of ways in which this can be done. We will not take it towards the second half, we will start doing a number of things even in the first half. Iif we have to look at about Rs 30,000 crore we will have to start the exercise at the earliest and we will certainly do it. The various names I do not have them with me but they are all in the public domain. Q: There is fear that the colossal size of the government borrowing program will put a lot of pressure on the money market as it has already on yields. How worried is the finance ministry about that and are you considering any liquidity enhancing measures of your own from the fiscal side? A: The exercise will be in such a way that we are able to maintain the expenditure as we have planned and also ensure that qualitatively the expenditure is able to bring the desired benefits, improve the qualitative way in which expenditure is done so that it is able to get the desired benefits for the economy. As far as the borrowings are concerned, the numbers are predicated on the fact that we are not going to get adequate means of funding of the fiscal deficit through the small savings route. With the revision in rates for the small savings, we do expect that some amount of increase in the small savings correction would happen as we go along this year. When that happens, I am sure the pressure on the markets for the dated securities as well as on the Treasury Bill (T-Bill) will go down. You must have also noticed that we have reduced the amounts in one of the T-Bill auctions we were planning to do as given out in the calendar. My guess is that this year we will even have reduction in the quantum of borrowings which we will do from the dated securities. A small reduction is bound to be there. This number in overall terms is slightly higher than the last year but we would certainly find ways and means to see how we can bring this number back close to what we did last year. Q: Let me ask you once again about the fuel subsidy because that is something which a lot of people are unable to digest. Why has the government reigned in public sector companies from raising petrol prices even as they have not assured them of compensating them of the petrol losses, which technically they do not have to because it is a deregulated commodity. Can you give us a simple answer? A: In this case all I can tell you is that it should have happened. There is no policy requirement on that. We feel that is an area which should be attended to speedily. I am sure my colleagues in the petroleum ministry are working on it. We are also conscious of the number of other issues that come in the way but I am sure that is an issue which will be resolved at the earliest.