New Delhi: Finance minister P. Chidambaram promised a blueprint for fiscal consolidation, a review of the controversial retrospective amendments to tax laws, and policy changes to boost investor interest in insurance and mutual funds, as he continued India’s efforts to effect an image makeover and project an investor-friendly face.
Chidambaram’s statements, coming days after he took over as the country’s new finance minister, reflected the same thinking that prompted Prime Minister Manmohan Singh, the custodian of the portfolio for five weeks, to review tax laws that had spooked investors, and, more importantly, signalled a radical shift in thinking in North Block. Significantly, the statements, the minister’s first after taking over, came a day after he changed portfolios in the finance ministry and relieved R.S. Gujral, finance secretary, of the charge of the revenue department. Gujral had become the face of the finance ministry’s investor-unfriendly tax laws.
A file photo of Finance minister P. Chidambaram
Adi Godrej, president of the Confederation of India Industry, said in a release that Chidambaram’s statements will improve business sentiment. “We are hopeful that the next few days will see some measures for economic revival being announced... The time has come for acting fast and decisively on issues such as high interest rates, inflation, fiscal deficit, current account deficit and declining investors’ confidence,” he said.
In a clear reversal of stance from the tax policies followed during the tenure of predecessor Pranab Mukherjee, Chidambaram said the government will aim to provide “clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution, and an independent judiciary”.
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The government’s proposal to make retrospective changes in the law as well as general anti-avoidance rules (GAAR) provisions had drawn widespread criticism and created uncertainty among foreign and domestic investors, with the issue being raised by trade lobbies and foreign governments.
“Uppermost in my mind is the duty to regain the confidence of all stakeholders,” Chidambaram said.
Accordingly, he ordered a review of the tax provisions introduced in this year’s budget that have had a retrospective effect. The government has already set up two committees to look into GAAR and taxation of information technology (IT) and IT back-office services companies.
Separately, finance ministry officials indicated that the Direct Taxes Code Bill is now likely to be taken up only in the winter session of Parliament and not in the monsoon session as had been expected. The code will ensure stability in the tax regime once it is legislated.
Mukherjee had, in this year’s budget, introduced a retrospective amendment in an effort to tax transactions between foreign entities, but with an underlying asset in India, such as the acquisition of Hutchison Telecommunications International Ltd’s stake in Hutchison Essar Ltd by Vodafone Group Plc. The amendment came after the Supreme Court ruled against the tax department in its case against Vodafone. In January, the apex court had ruled that the income-tax department had no jurisdiction to tax the $11.08 billion transaction (in 2007).
In the same budget, Mukherjee also signalled a move to a GAAR regime that gave tax officials significant powers to investigate and tax transactions arising from tax-friendly regimes. The move didn’t find favour with foreign institutional investors (FIIs) that account for the largest proportion of investments in Indian equities.
A review of GAAR and retrospective amendments, the two most contentious issues in the budget, is a step in the right direction, said Vipul Jhaveri, partner at Deloitte Haskins and Sells. “It is a clear message to foreign investors that Indian tax laws are not hostile, but we will have better clarity when the government comes out with the final changes,” he said. “The government can limit the application of the retrospective amendments through a circular. As far as Vodafone is concerned, the matter is settled as of now as it has been decided by the Supreme Court.”
Chidambaram also said the government will announce, in the coming weeks, measures to make insurance policies and mutual funds more attractive in an effort to boost savings. Large public sector enterprises with substantial cash balances will also be encouraged to restart investment, he said, reiterating a proposal initiated by Prime Minister Singh.
He said the government hopes these measures will raise the level of investment to the 38% of gross domestic product (GDP) that was achieved in 2007-08. That proportion has since fallen to 32% in 2011-12. Investment holds the key, said an executive at an FII.
“Recent inflows of around $2 billion by foreign institutional investors show that foreign investors were not really concerned about all this,” said U.R. Bhat, managing director of Dalton Capital Advisors (India) Pvt. Ltd, an FII registered in India. “The move (the statements made on Monday) is one in response to foreign investor sentiment rather than anything else. But if we talk about a revival of domestic markets, local sentiment has to improve. Unless the local entrepreneurs display some confidence by investing in at least running projects, market sentiments may not improve.”
The other issue before India is a looming fiscal deficit, and Chidambaram promised fiscal consolidation and hinted at a recast of the subsidy regime. “I would like to make it clear that the burden of fiscal correction must be shared, fairly and equitably, by different classes of stakeholders,” he said, indicating a likely increase in diesel prices.
The government has asked former finance secretary Vijay Kelkar, economist Indira Rajaraman and former expenditure secretary Sanjiv Misra to assist it in formulating the path of fiscal consolidation through adjustments both on the revenue and the expenditure side, he said. All three were part of the 13th Finance Commission.
India is targeting a fiscal deficit of 5.1% of GDP in 2012-13, but this is based on the assumption that the government will be able to limit its subsidy bill to under 2% of GDP. The country’s fiscal deficit in 2011-12 was at 5.8%, higher than the target of 4.6%.
Chidambaram also promised a strategy to contain inflation, including removing supply-side (or capacity) constraints and using existing foodgrain stocks to rein in food inflation. Wholesale price inflation was 7.25% in June and retail inflation was 10.02% in the same month.
The minister also seemed to signal selective interest rate relief. “We are conscious that current interest rates are high. High interest rates inhibit the investor and are a burden on every class of borrowers,” Chidambaram said. “Sometimes it is necessary to take carefully calibrated risks in order to stimulate investment and to ease the burden on consumers. We will take appropriate steps in this regard.”
Anirudh Laskar in Mumbai contributed to this story.
remya.n@livemint.com
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