On Sunday, Union finance minister P. Chidambaram said amendments to the part of the income-tax law that deals with taxation of investments have been finalized. Hopefully, this will be the end of the controversy over the general anti-avoidance rules (GAAR) that at one point threatened to turn away foreign investors.
There is no doubt that taxation is a sovereign function that cannot be subjected to the whims of investors. But equally, it is important not to use these provisions to hound investors, which is what GAAR was in danger of turning into.
The key to resolving the issue lies in understanding that India, as other countries, needs a rules-based taxation system that should not veer towards extreme directions—bending to investors’ whims or create a tax inspector raj.
In any case, the rates of taxation, exemptions and other matters are technical issues that shouldn’t be politicized.