GAAR riddance

Now PM must tackle retrospective tax. Only then will he find space to revamp long-term fiscal policies

Through Friday's order on general anti-avoidance rules (GAAR), Prime Minister Manmohan Singh has indicated that he is keen to reverse the government's taxation policies from a collection-focused domain to an investor-friendly domain. By giving the committee headed by Parthasarathi Shome the mandate to rewrite tax laws relating to foreign investors in the Indian capital markets, Singh has made this clear. More notably, this is the second order on the controversial subject that Singh has issued within 15 days of taking over the additional responsibility of the finance ministry — a keen acknowledgment of the fact that this is a piece of tax legislation introduced in Budget 2012-13 that can potentially undo the regime of predictable and stable tax policies India had begun to build over the past decade and more.

The order issued on Friday allows the four-member committee to effectively junk the entire set of draft GAAR guidelines issued by the finance secretary with unusual gusto on July 1, write a fresh set and invite comments thereon. To be sure, there is a need for more consultation on the rules and for greater clarity on many fronts. There are concerns about whether unilateral action by an arm of the government, in this case the revenue department, can override a treaty with another nation — in this case, Mauritius — approved by Parliament. This is exactly what the finance ministry had set out to do by introducing the provisions in the Finance Bill.

The visits by the foreign minister of Mauritius and the prime minister of Singapore in the same fortnight must have helped Singh in drawing up his position. Both visitors, coming from the two capitals from where 51 per cent of the inflow of foreign capital into the Indian stock market takes place, raised these concerns with the Indian PM. GAAR has also caused collateral damage. India intended to use the Singapore PM's visit to press for more access for Indian skilled labour under the Comprehensive Economic Cooperation Agreement. But while that issue was duly raised, the focus lay elsewhere, much to India's disadvantage. The elephant in the room is, of course, the issue of retrospective tax. Singh must tackle that too. Only then will he find the space to move on to more long-term fiscal policies like introduction of GST.

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