Govt To Post Clarifications On Retro Tax Amendments

Government will publish on Thursday clarifications on a set of rules targeting tax evasion that sparked an outcry among foreign investors at a time that the country needs capital inflows, a government official said.

Finance Secretary R.S. Gujral told reporters the draft rules to be posted on Thursday would cover the general anti-avoidance rules, which target companies and investors that route investments through tax havens such as Mauritius.

A day after Prime Minister Mamohan Singh raised concerns over tax matters, the Finance Ministry said it will provide clarifications to the PMO in two-three weeks on the issues, including the retrospective tax amendment which requires Vodafone to pay Rs 20,000 crore.

"Prime Minister's Office (PMO) sought clarifications on taxation issues and Section 9 of Income Tax Act (related to tax on indirect transfer of assets).... We asked them to give us two-three weeks time," Finance Secretary R S Gujral told reporters.

The government will issue draft rules for the General Anti-Avoidance Rule (GAAR), aimed at fighting tax evasion, by Thursday evening, Finance Secretary R.S. Gujral told reporters.

He ruled out any plans to further defer implementation of General Anti-Avoidance Rules (GAAR), which had evoked sharp reactions from both domestic and foreign investors.

The government had already postponed the Budget proposal of implementing GAAR by one year to April, 2013.

Meanwhile, a PMO official told Reuters that Singh plans to issue an "explanatory note" on portfolio investments, without giving details about what the statement would say or which tax issues it would address.

It is widely known that the Prime Minister's Office was unhappy with the way that former Finance Minister Pranab Mukherjee handled controversial tax proposals that were part of the 2012-2013 budget announced in March.

The proposals to crack down on tax evasion and allow the government to make retroactive claims on overseas deals involving Indian assets sparked alarm in foreign capitals, including Washington, and an exodus of funds from India, although it remains a popular destination for investors.

Singh said at a meeting of economic advisers and top finance ministry officials on Wednesday that "reviving investor sentiment" was a top priority. He temporarily assumed control of the finance ministry on Tuesday after Mukherjee stepped down to run for president.

The uncertainty about taxes had led some investors to reduce investments in India, with $926.8 million in outflows from markets in April, sharply down from a combined $12.3 billion in inflows from January to February.

The rupee rose by a whopping 35 paise on Thursday to close at 56.80 against the dollar amid hopes that Prime Minister Manmohan Singh who himself has taken over the Finance portfolio will initiate steps to prop up the economy and halt the currency's slide.

The Indian stock market benchmark Sensex rose for the third straight day today edging up 23 points to close at 16,990.76.

Retro Effect
The decision of former Finance Minister Pranab Mukherjee to amend the Income Tax Act with retrospective effect to tax overseas deals involving domestic assets had generated a lot of controversy.

Ignoring the criticism, Mukherjee went ahead with the proposal which now had become a part of the statute. The changes will have direct implications on the British telecom major Vodafone though it won the tax case in the Supreme Court.

On Wednesday, Singh, who took charge of the finance portfolio after Mukherjee resigned to contest the Presidential election, held meetings with key economic advisers and underlined the need for reversing the climate of pessimism and regenerating the "animal spirit" in the economy.

Meanwhile, Vodafone India Chairman Analjit Singh, met Planning Commission Deputy Chairman Montek Singh Ahluwalia and is believed to have discussed the taxation issue with him.

The Vodafone India chief in the past had met Finance Ministry officials on the issue of implications of the retrospective tax amendments on the British company.

Besides retrospective tax amendments, Gujral said the Finance Ministry will also be coming out with "certain clarification on indirect transfer pertaining to FIIs".

Referring to speculations over postponement of GAAR beyond April 2013, he said there is "no deferment...GAAR is staying".

Earlier in the day, Cabinet Secretary Ajit Seth took stock of the economic situation with top bureaucrats of various ministries to firm steps for arresting the slowdown in growth.

India's economy is growing at its slowest pace in nine years, the rupee is the worst performing currency in Asia this year, inflation remains high, industrial production has flatlined and the country faces the threat of having its credit rating downgraded to junk.

India's economic growth during 2011-12 slipped to 9-year low of 6.5 per cent and the current fiscal it is not expected to do much better. The domestic currency too has depreciated sharply in the recent weeks going below Rs 57 to a dollar.