Wednesday, April 25, 2012

GAAR – Ambiguity Persists

 Introduction of the a contentious  new tax proposal by the government, called the General Anti-Avoidance Rule, has dented the market sentiments and is likely to hurt foreign investments too.

The General Anti-Avoidance Rule was introduced with the objective to "counter aggressive tax avoidance schemes."  It empowers officials to deny the tax benefits on transactions or arrangements which do not have any commercial substance or consideration other than achieving tax benefit. It could also be used by the government to target participatory notes (P-Notes).  GAAR would also empower the tax authorities to overcome the Double Taxation Avoidance Agreement (DTAA) and deny the benefits of Tax Avoidance to the FIIs which route their investment through Mauritius which is a Tax Haven.

On the other hand, the Indian Government has reiterated many times that India is not a Tax Haven and would take cautious steps in consolidating this stance. The government has also stated that the double taxation avoidance treaty has been exploited by foreign investors, especially in the capital market, to avoid capital gains taxes in India but with GAAR they are bound to prove the substance of their business in Mauritius.

It is not only a domestic issue rather tax avoidance is of international concern now and several countries have either already codified GAAR in their tax statutes or are in the process of doing so.  GAAR has been a part of the tax code of Canada since 1988, Australia since 1981, South Africa from 2006 and China from 2008. Australia and China also have SAAR (Specific Anti Avoidance Rule) in place to check abuse of tax treaties and transfer pricing.

But the lack of clear indication of how and on whom the GAAR would be imposed, this is what is spreading an alarming negative sentiment across the economy. Then the concern of treaty override needs to be handled carefully otherwise it would lead to violation of international convention. Analysts also feel that the timing of introduction of GAAR was not appropriate when the image of our country was reeling with negativity like policy paralysis, CAD and Fiscal Deficit.

So let’s wait and watch how the Finance Ministry would act on this ambiguous proposal.

Sunday, April 22, 2012

RBI’s Closed-Eye Bonanza?

In RBI’s annual monetary policy review meeting, a surprise was unfolded by the central bank:

·         With Repo Rate cut by 50 basis points (bps) after a long time.
·         Reverse Repo and Marginal Standing Facility was placed above and below by 100 bps.
·         MSP now stands at 2 percent of their outstanding Net Demand and Time Liabilities (NDTL) from 1 percent before.

These major changes in the monetary policy really boosts RBI’s expected GDP growth rate of 7.3% in 2012-13 but the point to be contemplated upon is: Will this estimation turn out to be a reality? Many experts believe that monetary easing alone would not be sufficient to boost the growth projection. And it is absolutely correct because until our Fiscal deficit and Current Account deficit is not tamed the projected momentum is an elusive dream. This clearly points out the policy paralysis in which our system is currently entangled. Even in the recent budget there has not been an impressive reform to boost our economic condition.

On the other hand thought with persistent rate hikes by the RBI it has clearly succeeded in bringing the inflation under control but still there are Inflationary pressures, especially food inflation, have regained momentum and the upside risks have risen. In coming months, consumer goods and services inflation would also be adversely impacted due to indirect tax increases. Inflation declined temporarily after November 2011, but has remained stubborn at 6.9 per cent in the fourth quarter of 2011-12. Finally, coal and electricity prices are already being revised upwards and the process is likely to continue throughout the year. The wage-price spiral in India has strengthened since last year, because wages in the rural economy now rise in line with inflation, with inflation-linked wages under Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) setting the floor. All these inflationary alarming bells can get louder if ignored.

External factors like demand from the Rest of the world has also been bearish, rising fuel prices and the world economic volatility has also applied brakes on the exports growth of our country and putting appreciative pressure on the rupee. Coupled with all these factors the slowdown in the investment has also been attributed for this tepid growth rate. Hence, for growth to revive, the investment climate, supported by appropriate policy reforms, will have to improve.

So it can be concluded that though RBI did its part by easing up of the monetary policy but still it cannot alone provide the required impetus to the economic momentum, it definitely needs government’s support to push the reforms ahead for prosperity and economic stability.

Thursday, April 5, 2012

Retrospective Amendment: Justified or Vindictive?

In 1965 while delivering a public lecture on The Indian Tax System, late Mr Nani Palkhivala, one of the most revered tax lawyer of India highlighted the uncertainty of the tax laws in the country and cited its unpredictable nature as one of the pernicious characteristic. Now in 2012, British chancellor of the exchequer George Osborne called for “greater predictability) in the Indian tax policies. Connecting the dots would help us to understand the issue now.
In Budget 2012-13, Finance Minister Pranab Mukherjee has proposed amending the Income Tax Act retrospectively from 1962 to bring under net overseas deals involving domestic assets. This would have a bearing on Vodafone which won the legal dispute in Supreme Court over Rs 11,000-crore tax claim raised on its USD 11-billion deal with Hutchison Essar in 2007. Now, the retroactive law threatens to upturn the court verdict.
Will this verdict be overthrown by the Government’s amendment in the law or will the Apex Court’s decision will be given supremacy? The question is not only confined to the inland domestic tax situation but with this amendment will the Foreign Investor’s investment in the country would also be impacted or will the sentiments get dented? This question is also extremely important to be thought upon.

Though the Government official justifies the step taken by the Finance Minister and also confirms that the amendment won’t affect the FDI inflows in the country, which is already under a great stress from the other parties’ objection. They also have a view that amendments in The Income Tax Law is normal process and happens every year, in 2007-08 budget, there were eight amendments in tax laws, five amendments in 2008-09, four in 2009-10 and eleven in 2010-11.

But on the other side there are views from the industry that such amendments would hamper the sentiments of the large business houses and their investment in the country. Mr Ashok Malik, a political commentator feels that “post facto laws are increasingly seen as immoral and vindictive. Today, with international capital flows intensifying, the rules of the game cannot be changed mid match”. If the amendment would have been for the future deals of the similar fashion then it would have been a completely different issue. But the present amendment can even rope in deals like Kraft Foods’ acquisition of Cadbury India, SABMiller’s purchase of Fosters etc, so that is why the present issue is getting more and more debatable.

Though the government would proceed with the present amendment made in the law but it should definitely take into consideration the present situation of our country. Today our nation requires a boost of reforms and financial stimulus in the key areas of the economy to continue to attract the foreign investors on the land which provides equal opportunities for everyone who pitches in for business and to move on the trajectory of 8% GDP growth rate. And through these changes in the law I somehow believe that the government on its own is creating a self defeating economic agenda which can negatively impact the long term prospects of the nation.