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Monday, 03 September 2012 06:20
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That's the message the finmin is now trying to give

After Pranab Mukherjee’s disastrous budget where the government sought to tax Vodafone-type overseas deals with retrospective effect (and after the Supreme Court had ruled against this!) and then give unfettered powers to the taxman to reinterpret deals under the guise of General Anti-Avoidance Rules (GAAR), the finance ministry has been in damage-control mode. When he handled the finance ministry after Mukherjee left to become President, the Prime Minister tried the same thing, only to be tripped up by the tax bureaucracy and leaving him red-faced enough to say he had not seen the draft GAAR guidelines before they were put up on the ministry’s website. Under P Chidambaram, the Shome Committee has been a lot more thorough and has, to begin with, suggested the entire exercise be put off for three years, enough time for the taxman to get trained in the finer aspects of international taxation—the recent example with Vodafone clearly convinced the Shome panel that such training is lacking. Two, it has made it clear that, as long as there is a Mauritius treaty, the treaty will be respected and FIIs coming out of there will not be subjected to taxation provided they have the requisite certification. More important, grandfathering will be an essential feature of the GAAR. Interestingly, the panel even recommends removal of short-term capital gains on transactions in shares—though the taxman will obviously lose on revenues, the panel’s view is the gains to be got from encouraging capital markets will be far greater—though the panel’s views are with respect to GAAR and therefore don’t need to be notified in a hurry, the finance minister would do well to consider this suggestion separately.

Though the Shome panel was not about retrospective taxation, the finance minister may get some help from the Standing Committee on Finance. In its latest report, after castigating the government for not doing enough by way of reforms and needing to come up with “less layered yet more effective decision making”, the Yashwant Sinha-headed committee has come out against retrospective taxation in a big way, saying it was one of the reasons for the sharp fall in international investor sentiment. While Sinha has supported Parliament’s right to make retrospective taxation, he had clarified that this was a power to be used very carefully and in very rare circumstances. So, were Chidambaram to roll back the retrospective taxation brought in by Mukherjee, he should logically find support from the BJP—though, in these times, that may not be a given. Whether he chooses to do so, of course, will depend upon the impact on tax collections—investors, like the Ruias who have paid taxes on their Vodafone-sales, are already demanding refunds. The larger point, of course, is that even if Chidambaram rolls back the retrospective taxation and the GAAR proposals, that still takes us back only to the pre-March 16 situation. The budget dramatically worsened matters, but the investor mood had turned hostile long before that.


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