GAAR: Why Pranab Mukherjee had to be President
by Ramtanu Maitra on 23 Jul 2012 8 Comments

The decision to name Pranab Mukherjee as the Congress Party’s presidential candidate was taken after much deliberation. There were umpteen indications that neither Washington, nor London, nor the international bankers, cared much for Mukherjee as the Finance Minister. They needed someone else. Someone like Deputy Chairman of Planning Commission and the old IMF employee, Montek Singh Ahluwalia, who would strengthen the hands of the reform-oriented Indian Prime Minister Manmohan Singh. Singh has now got the portfolio and President Obama has spoken out recently “advising” India to carry out more reforms.


A straightforward removal, otherwise known in the corporate world as “retiring” Mukherjee from the Finance Minister’s job, was not easy.  Mukherjee had a lot of clout within the party, and outside within the opposition. That is because he  was careful and he knew the threats the rampant globalization and liberalization pose to a country like India with hundreds of millions of poor, 1.2 billion people, and the growing disparity between the  hundreds of millions poor and others.


But the proverbial straw that broke the camel’s back, or in other words, that which made Manmohan Singh succeed in influencing Sonia Gandhi to kick Pranab Mukherjee upstairs, was the General Anti-Avoidance Rules (GAAR). Pranab Mukherjee, in his capacity as the Finance Minister, in his budget for 2012-13, had proposed GAAR in order to “counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel”. All that GAAR said is that if you want to do business in India, you have to pay tax. Fair enough.  


But, GAAR set the cat among a flock of pigeons. Asia Securities Industry & Financial Markets Association (ASIFMA) along with Securities Industry and Financial Markets Association (SIFMA) wrote to the Finance Minister contending that “such onerous taxation or even the risk of such taxation could threaten this important source of capital for India's businesses”.


This letter also reminded the Finance Minister that the FIIs are carefully evaluating these new tax risks. The letter said the proposals are too broadly worded. FIIs have assets under custody of more than Rs. 10 lakh crore or 17 per cent of the capitalization of India's equity markets. Further, these entities also invest in Indian government and corporate debt, the letter reminded the Finance Minister.


India’s stock market, Dalal Street, did not like the concept of rules against tax avoidance and moved southward quickly on concerns that all short-term capital gains made by the FII and Participatory Notes (instruments issued by registered foreign institutional investors – FIIs – to overseas investors) will be taxed.


As per the Finance Bill presented by Mukherjee, GAAR would be applicable from April 1. But things have changed since Mukherjee has been “removed.” Now that the finance portfolio is in many hands, internal and external, that guide India’s Prime Minister Manmohan Singh, implementation of GAAR, proposed in the Budget 2012-13, has been deferred by one year to April, 2013. Again, that date is not etched on granite. If the City of London and the Wall Street okays the new and reformed version of the GAAR, then that date will be the target. Otherwise…


The revision of GAAR is very much in progress. The dilly-dallying, a wonderful device to delay and fog up clear views, has begun in full earnest. Chief of Prime Minister-appointed panel on GAAR, Parthasarathi Shome said (PTI report) that diluting the process has begun. “We are first talking to major and minor tax advisory firms, who are familiar with the guidelines. We will also talk to the Union Finance Minister, Planning Commission and other stakeholders,” he said.


“We will also look at some international practices in this regard... will see what is relevant for us and then narrow down the guidelines,” Shome  added.


In so many words, what Shome is conveying to the investors and FIIs is this: now that your friends are in control of this GAAR, they will discuss with you and make sure that the new rules do not make you pay taxes more than the amount you would feel comfortable with. Even if the GAAR is not  abandoned outright, Manmohan Singh and his internal and external guides will see to it that the GAAR, after it is reformed, begins to  look like a piece of Swiss cheese with hundreds of holes to escape paying  due taxes.


The author is South Asian Analyst at Executive Intelligence Review

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