By Rajesh Kumar Singh and Ross Colvin
NEW DELHI, June 28 India published draft
guidelines on Thursday to implement rules that target tax
evasion but have provoked an outcry among foreign investors at a
time when the country needs capital inflows.
The general anti-avoidance rules (GAAR), introduced in the
federal budget in March this year, target companies and
investors routing investments through tax havens.
Vague wording and lack of clarity on their implementation
left scope for potential misuse, which panicked foreign
investors and hammered India's equity and currency markets.
A flight of investors forced the government in May to defer
implementation of the guidelines until 2013.
The guidelines issued by the Finance Ministry have sought to
address some of the concerns by suggesting GAAR be invoked only
in cases where foreign investors have opted to take the benefit
of tax treaties entered into with India.
"Where an FII (foreign institutional investor) chooses to
take a treaty benefit, GAAR provisions may be invoked in the
case of the FII, but would not in any case be invoked in the
case of the non-resident investors of the FII," the draft
The rules would not apply retrospectively, as many investors
had feared, and would apply only to income accruing from April
1, 2013. An income threshold also has been suggested for
invoking the GAAR.
The guidelines say that the onus of proving tax liability
lies with the Indian authorities and have proposed time limits
for completion of various actions under the GAAR.
The draft guidelines come after a government official told
Reuters that Prime Minister Manmohan Singh would seek within two
to three weeks to clear up confusion over tax policy that has
rattled investor confidence in Asia's third-largest economy.
Though the flurry of comments and promises of action have
lacked specifics, investors are anticipating more policy reforms
after Singh on Tuesday assumed an additional role of acting
finance minister after the previous incumbent, Pranab Mukherjee,
"The market is having significant expectations that a lot of
tax policy issues would get sorted out and there will be renewed
focus on investment cycle," said Nilesh Shah, chief executive of
Envision Capital, an investment advisory firm in Mumbai.
"Markets are eyeing either fiscal measures, monetary
measures, tax measures or clarity on policy issues to move
further," he added.
Another issue that has displeased investors is an amendment
to income tax law that empowers the government to retroactively
Analysts says the move is intended to target Vodafone's
, purchase of Hutchison Whampoa's Indian assets, as the
government says the London-based mobile operator had structured
the deal to avoid paying taxes.
REVIVING CAPITAL INFLOWS
Earlier, an official told Reuters the prime minister's
office planned to issue an "explanatory note" on portfolio
investments, without giving details about what the statement
would say or which tax issues it would address.
However, it is widely known that the prime minister's office
was unhappy with the way Mukherjee handled the tax proposals in
the federal budget in March.
Singh said at a meeting of economic advisers and top Finance
Ministry officials on Wednesday that "reviving investor
sentiment" was a top priority.
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.
A Finance Ministry official said the government recognised
that a revival of capital inflows would prop up the equity
market, bringing retail investors into mutual funds. This in
turn would deter investments in gold and other assets, which
widen the current account deficit.
Singh told officials at Wednesday's meeting he was concerned
that "investor sentiment is down and capital flows are drying
He said he wanted to revive the "animal spirit" of an
economy that was roaring with growth of well above 9 percent in
the three years before the global financial crisis in 2008-2009.
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.
Many investors and economists blame weak leadership and
muddled policies that have failed to curb government spending
and alienated many foreign investors.