PM-finmin goofup augurs badly for future reforms
That Prime Minister Manmohan Singh had to distance himself, in his new role as finance minister, from the finance ministry’s new draft General Anti Avoidance Rules (GAAR) guidelines less than 12 hours after they were issued suggests the reforms road ahead is going to be a bumpy one. The sequence of events is even more curious. On the 27th, at 9:21pm, the Press Information Bureau (PIB) issues a press release on Dr Singh telling officials reviving investor sentiment was critical, and one of the points he stressed was the “problems on the tax front which need to be addressed”. These, it was obvious, referred to the Vodafone retrospective tax amendment and the proposed GAAR which investor outrage had forced Pranab Mukherjee to postpone by a year. Given this, you’d think the new finance minister would be given a detailed presentation on GAAR, and he would get to put his imprimatur on this before it was made public.
Indeed, the finance secretary even met the principal secretary on the 28th, presumably to discuss issues like coordination between the PMO and the finance ministry. Yet, in an unusual display of working overtime on critical issues, the finance ministry issued draft GAAR guidelines, replete with examples on where GAAR would apply and where it would not at 10:39pm. Presumably, you feel, the PMO authorised this, after all these were draft guidelines meant to get reactions of the concerned public before they were finalised. Less than 12 hours later, at 10:01am on the 29th, however, the press information bureau puts out a press release from the PMO which says “these have not been seen by the Prime Minister and will be finalised with the approval of the Prime Minister, who holds the Finance portfolio, only after considering the feedback received”. So wasn’t the Prime Minister shown the draft guidelines before? Considering the new reforms thrust depends on perfect coordination between the PMO and the finance ministry, with the PMEAC and the Planning Commission thrown in as well, this is bad news.
When you read the draft guidelines, it suggests the PMO may not have been fully aware of what was being done. On the critical issue of whether FIIs were to be taxed or not—this was one of the reasons why the budget announcements on GAAR were put in abeyance—the guidelines are quite clear: “where a Foreign Institutional Investor (FII) chooses not to take any benefit under (the Mauritius DTAA for instance) then, the provisions … shall not apply … Where an FII chooses to take a treaty benefit, GAAR provisions may be invoked in the case of the FII”. (For some reason, the provisions are not to be invoked in case of Participatory Note (PN) investments—that is, while the FII will pay tax, there will be no inquiry by the taxman of the PN holder.) Getting a guideline to say GAAR will override the Mauritius treaty is curious, and given India’s precarious balance of payments situation, possibly the last thing we need.