GAAR likely to be deferred by 2 years
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The decision, likely to be a key announcement of Budget 2013-14 is the lynchpin of a series of measures to help revive investments from abroad in the economy, especially at a time when the government has little space for fiscal sops.
The step underscores finance minister P Chidambaram's announcement on Wednesday. "I would like to once again underscore the crucial importance of FDI and FII. As I have said before, attracting foreign funds to India has become an economic imperative," he told reporters at a briefing about the worsening current account deficit.
A senior official said, "Investors have been wary of the Indian economy ever since proposals relating to GAAR and retrospective taxation were announced. Deferring roll out of GAAR would give a lot more tax certainty to them, which is crucial for reviving growth".
The government is banking heavily on foreign investments as it tries to pull out of a sub-six per cent growth trajectory and fund a current account deficit that touched 5.4 per cent of the GDP in the second quarter of the fiscal.
An expert committee headed by tax expert Parthasarathi Shome had earlier suggested postponing the implementation of the proposal aimed at preventing tax avoidance to 2016-17 but the revenue department had contested it saying the period would too long. Shome is now the adviser to Chidambaram.
The government is also likely to accept the panel's suggestion that GAAR should kick in only in cases where the tax benefit is over Rs 3 crore.
The finance minister had last month said the proposed amendments to GAAR had been submitted to the Prime Minister's Office, which would take a final call on the issue.
Announced as part of Budget 2012-13 by former finance minister Pranab Mukherjee, GAAR was intended to check tax avoidance by multi-national firms that use tax havens to route their investments into India.
But the controversial tax law had raised the hackles of foreign as well as domestic investors who felt that it may give unrestrained powers to tax authorities and was put on hold till April 1, 2013. Registration by FIIs with the market regulator had fallen for the first time in a decade in calendar year 2012.
The Shome committee was set up by Prime Minister Manmohan Singh to review the proposal.
The panel submitted its report on October 1.
"GAAR is clearly not a revenue raising measure and its roll out at this stage would dampen the improving investor sentiments. Further, since it is a sophisticated tax legislation, both the revenue officials as well as taxpayers need to understand and absorb it before rushing into it," said Sudhir Kapadia, partner and national tax leader at Ernst and Young.
* Parthasarathi committee had earlier suggested postponing the implementation of the proposal to 2016-17
* The government is also likely to accept the suggestion that GAAR should kick in only in cases where the tax benefit is over Rs 3 crore.
* Registration by FIIs with Sebi had fallen for the first time in a decade in calendar year 2012
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