New Delhi: Government will publish on Thursday clarifications on a set of rules targeting tax evasion that sparked an outcry among foreign investors at a time that the country needs capital inflows, a government official said.
Finance secretary R.S. Gujral told reporters the draft rules to be posted on Thursday would cover the general anti-avoidance rules, which target companies and investors that route investments through tax havens such as Mauritius.
Gujral’s comments come after a government official told Reuters Prime Minister Manmohan Singh would seek within two to three weeks to clear up confusion over tax policy that has rattled investor confidence in Asia’s third-largest economy.
Though the flurry of comments and promises of action have lacked specifics, investors are anticipating more policy reforms after Singh on Tuesday assumed an additional role of acting finance minister after the previous incumbent, Pranab Mukherjee, stepped down.
“The market is having significant expectations that a lot of tax policy issues would get sorted out and there will be renewed focus on investment cycle,” said Nilesh Shah, chief executive of Envision Capital, an investment advisory firm in Mumbai.
“Markets are eyeing either fiscal measures, monetary measures, tax measures or clarity on policy issues to move further,” he added.
The GAAR rules sparked controversy when they were introduced in March, as economists and investors said the wording was vague, creating uncertainty at a time when the country needs capital inflows to help plug a widening current account deficit.
Foreign investors feared the government would use the rules to target portfolio investments routed through countries that have a double tax avoidance treaty with India, such as Mauritius.
Mukherjee sought to placate investors in May by deferring GAAR until 2013.
Another issue that had displeased investors was a proposal to give the government power to retroactively tax investments.
Analysts at the time said the rules had been intended to target Vodafone’s, purchase of Hutchison Whampoa’s Indian assets, as the government had said the London-based mobile operator had structured the deal to avoid paying taxes.
Reviving Capital Inflows
Earlier, an official told Reuters the prime minister’s office planned to issue an “explanatory note” on portfolio investments, without giving details about what the statement would say or which tax issues it would address.
However, it is widely known that the prime minister’s office was unhappy with the way Mukherjee handled the tax proposals announced in March.
Singh said at a meeting of economic advisers and top finance ministry officials on Wednesday that “reviving investor sentiment” was a top priority.
The uncertainty about taxes had led some investors to reduce investments in India, with $926.8 million in outflows from markets in April, sharply down from a combined $12.3 billion in inflows from January to February.
A finance ministry official said the government recognised that a revival of capital inflows would prop up the equity market, bringing retail investors into mutual funds. This in turn would deter investments in gold and other assets, which widen the current account deficit.
Singh told officials at Wednesday’s meeting he was concerned that “investor sentiment is down and capital flows are drying up”.
He said he wanted to revive the “animal spirit” of an economy that was roaring with growth of well above 9% in the three years before the global financial crisis in 2008-2009.
India’s economy is growing at its slowest pace in nine years, the rupee is the worst performing currency in Asia this year, inflation remains high, industrial production has flatlined and the country faces the threat of having its credit rating downgraded to junk.
Many investors and economists blame weak leadership and muddled policies that have failed to curb government spending and alienated many foreign investors.