Guidelines on GAAR junked, PM sets up new panel

The government on Friday effectively junked the controversial anti-avoidance tax rules (GAAR) that the finance ministry had put up on its web site on June 28.

Prime Minister Manmohan Singh set up an expert committee under Parthasarathi Shome, director and chief executive of the economic policy think tank ICRIER, to frame fresh draft guidelines by the end of September 2012.

The announcement setting up the four-member committee came two days after visiting Singapore Prime Minister Lee Hsien Loong told reporters that the business environment in India had become "complicated" for investors. Earlier this month, the foreign minister of Mauritius, Arvin Boolell, had complained that the proposed General Anti-Avoidance Rules (GAAR) were unilateral and against the terms of the India-Mauritius Direct Tax Avoidance Agreement.

Most foreign investors in India's capital market route investments through these two countries, which together account for about 51 per cent of total inflows. The scare over GAAR — which make it mandatory for the tax department to impose a capital gains tax on all investors in the Indian stock market — has led to a sharp drop in the flow of foreign investment since the middle of March. The Sensex has as a result fallen by 370 points or 2.1 per cent since March 1.

The PMO had issued a clarification the morning after the draft guidelines appeared on the ministry's site, distancing Singh from the contents. Friday's circular, however, said the guidelines had been issued "at the Prime Minister's behest".

* THE RULES empower taxman to deny benefits of transactions that have no commercial consideration except avoiding tax

* THE GUIDELINES intended to shut investment route through tax havens like Mauritius; spooked foreign investors

* NOW an expert committee under Parthasarathi Shome will frame fresh draft guidelines by September end

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