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India delays tax evasion steps after investor backlash

May 07, 2012


India's Finance Minister Pranab Mukherjee speaks with the media after presenting the 2011-2012 economic survey report, outside the parliament in New Delhi.—Reuters Photo
India's Finance Minister Pranab Mukherjee speaks with the media after presenting the 2011-2012 economic survey report, outside the parliament in New Delhi.—Reuters Photo

NEW DELHI: India delayed by one year the introduction of measures to crack down on tax evasion on Monday, moving to mollify overseas investors whose panic has led to a dramatic exodus of funds and hammered the rupee.

The proposals aim to target tax evaders through a general anti-avoidance rule (Gaar), cracking down on the abuse of tax havens.

The vagueness of the plan, which was unveiled by Finance Minister Pranab Mukherjee as part of India's budget for the fiscal year beginning in April, caused uncertainty among foreign investors and put an already weak government on the defensive.

“To provide more time to both the taxpayer and tax administration, to address all related issues, I propose to defer the applicability of Gaar provisions,” Mukherjee told parliament on Monday.

He said the burden of proving tax evasion would lie with the authorities rather than with overseas investors, and added that a government panel would come up with recommendations for application of Gaar provisions by the end of this month.

Indian stocks cut their losses and the rupee strengthened on Mukherjee's announcement.

“These comments should provide short-term relief to the domestic markets,” said Radhika Rao, an economist at Forecast Pte in Singapore.

“However, the decision to put the onus on tax authorities to prove liabilities could infuse some extent of ambiguity and subjectivity into the proposals. For now, the markets will cheer clarity on the provisions and deferment of the implementation date.”

Agreements with 82 countries

Last month, Finance Ministry officials met top foreign institutional investors (FIIs), including Morgan Stanley, JP Morgan, CLSA and Goldman Sachs in a bid to convince them that tax proposals were not targeted at  investors with a “substantial commercial presence” in Mauritius.

About 40 per cent of nearly $247 billion foreign direct investment flows to India over the last 12 years have come from Mauritius, and tax authorities believe a large part of it is routed by Indian companies to evade taxes.

Mukherjee also said a move to amend income tax laws retrospectively would not override the provisions of double taxation avoidance agreement India has signed with 82 countries, including Mauritius.

The proposed change was expected to tax already-completed mergers of foreign companies with Indian assets, potentially putting Britain's Vodafone back under the taxman's spotlight for more than $2 billion in taxes even after India's Supreme Court ruled in its favour.

“It would impact those cases where the transaction has been routed through low or no tax country with whom India does not have a double taxation avoidance agreement,” Mukherjee said.

He said a clarification would follow the passage of the finance bill.

India has said it may review its tax-break treaty with Mauritius, the East African island country through which the majority of foreign portfolio inflows are believed to be routed through.