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BW Businessworld

GAAR Rules By End Sept?

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As promised, within a fortnight of the Finance Ministry issuing draft guidelines on GAAR, Prime Minister Manmohan Singh set up a committee on 13 July to prepare fresh norms on the controversial tax provision to bring "greater clarity" and prepare a roadmap by September 30 for its implementation. Though planned as a move to shore up investor sentiment, the announcement could not prevent the Sensex from closing low for the third consecutive session.

The four-member committee, to be headed by ICRIER chief and taxation expert Parthasarathi Shome, will submit its report after consulting and taking feedback from stakeholders. "...A need was felt for far more widespread consultations. There is a need to have greater clarity on many other fronts," Singh's office said in a statement.

The general anti-avoidance rules (GAAR), first introduced in the budget in March this year, target firms and investors routing investments through tax havens.

But a lack of clarity on GAAR's implementation has panicked foreign investors, heightening their wariness about investing in India as they fear new tax rules could be misused.

Foreign investors have bought a net of Rs 7,312 crore ($1.31 billion) in Indian equities so far this month, according to provisional regulatory data, after selling in each of the previous three months.

Inflows at the mid-point of July are not far off the Rs 8,380 crore of net purchases in March. Analysts say investor sentiment changed after Prime Minister Manmohan Singh assumed an additional role as acting finance minister starting on June 26, sparking widespread hopes of policy reforms.

Valuations also playing a role after Indian stocks are seen by some analysts as trading below historic averages.

In a report late last month, Deutsche Bank estimated Indian shares were trading at their cheapest in close to two deades on a sales and EBITDA basis.

Also, this comes at a time when India needs higher capital inflows to fund its widening current account gap. A slowdown in foreign capital inflows has made the rupee the worst performing currency in Asia this year, raising fears in some quarters of a balance of payments crisis like the one it faced in 1991.

An investor backlash forced the government in May to defer implementation of GAAR until 2013.

"The Prime Minister has approved the constitution of an Expert Committee on GAAR to undertake stakeholder consultations and finalise the guidelines for GAAR (General Anti-Avoidance Rules)," a PMO statement said.

"This committee would manage the consultation process and finalise the draft GAAR Guidelines," it said.

The setting up of the committee to hold wider consulations on the controversial tax provision comes within a fortnight of the Finance Ministry issuing draft guidelines. However, the Prime Minister, who holds the Finance portfolio, was quick to distance himself from it, saying that he had not approved these.

"There is a need to have greater clarity on many other fronts. With this in view, the Prime Minister has constituted this Expert Committee which will bring transparency and a high degree of technical expertise to the consultation process," the PMO statement said.

"While postponing GAAR by one year to 2013 was a very welcome move, a widespread consultative process is necessary to generate a discussion on GAAR provisions so that there is an informed debate on how GAAR is going to operate," is said.

The committee will have N Rangachary, former Chairman of Insurance Regulatory and Development Authority, Ajay Shah, Professor at economic think-tank NIPFP and Sunil Gupta, Joint Secretary, Revenue Department, as members.

The Committee's Terms of Reference include receiving comments from stakeholders and general public on the draft guidelines already published by the government on its website.

The committee will also "vet and rework" the guidelines based on this feedback and publish the second draft for comments and consultations by August 31, the statement said.

The Terms of Reference will also include undertaking widespread consultations on the second draft GAAR guidelines and finalising these and a roadmap for implementation.

The report will be submitted to the government.

A schedule has been laid for the committee which includes receiving comments from stakeholders and general public till July-end. The guidelines are to be finalised, a roadmap for implementation prepared and submitted to the government by September 30.

Referring to previous steps taken on GAAR, the statement said the Revenue Department undertook some consultations with stakeholders before finalising the first draft set of guidelines. These consultations were done by invitation.

"Subsequently, at PM's behest, D/o Revenue put the draft guidelines on the web. This was widely welcomed as it lifted the veil on the GAAR Guidelines," it said.

This assumes significance as the PMO had issued a statement on June 30, within 12 hours of the first draft guidelines being put on the website, saying that Singh, holding the Finance portfolio, had not approved those.

"These (draft guidelines) have not been seen by the Prime Minister and will be finalised with the approval of the Prime Minister, who holds the Finance portfolio, only after considering the feedback received," a PMO release had said.

In 13 July's statement, the PMO said, "while these steps are good in themselves, a need was felt for far more widespread consultations."

Failed Reforms
Singh, hailed as an architect of India's two-decade long economic boom, is increasingly facing criticism for failing to carry out important reforms and souring investor sentiment through a series of policy flip-flops.

Asia's third largest economy, which once promised double-digit growth, expanded at its weakest pace in nine years in the first quarter of 2012 and is on the brink of losing its investment grade credit rating.

Singh has vowed to revive the economy's 'animal spirit' by addressing investors' complaints.

A government official later told Reuters that the GAAR rules will be published "soon" after the expert panel finalises the guidelines.

India released draft guidelines on GAAR last month for public comments. The expert panel will use the public feedback and rework those guidelines, and will publish the second draft guidelines for further public review by the end of August.

(BW Online Bureau & Agencies)