New Delhi: Signalling a rethink, Prime Minister Manmohan Singh on Friday approved the setting up of a committee under Parthasarathi Shome to finalize guidelines for the controversial general anti-avoidance rules (GAAR). The committee has been asked to finalize the guidelines by 30 September.

The constitution of the committee comes weeks after finance minister Pranab Mukherjee quit office to contest the presidential polls and Singh took charge of the finance ministry.

The proposed introduction of GAAR along with retrospective amendments in this year’s budget had evoked large-scale protests from foreign investors and led to the drying up of foreign inflows due to the increased uncertainty in the tax laws.

A file photo of Prime Minister Manmohan Singh.

The finance ministry released the first draft guidelines on GAAR on 28 June. But the very next day, the Prime Minister hinted that GAAR could see an investor-friendly makeover.

Significantly, the new committee comes at a time when a ministry appointed-panel comprising finance ministry officials has already begun holding discussions with stakeholders for further changes in the draft.

Implicitly suggesting a rethink, the release issued by the Prime Minister’s Office noted, “A need was felt for far more widespread consultations. There is a need to have greater clarity on many other fronts. With this in view, the Prime Minister has constituted this expert committee which will bring transparency and a high degree of technical expertise to the consultation process."

Shome is director and chief executive of the Indian Council for Research on International Economic Relations. Other members include N. Rangachary, a former chairman of the Insurance Regulatory and Development Authority; Ajay Shah, a professor at the National Institute of Public Finance and Policy; and Sunil Gupta, joint secretary, tax policy and legislation, in the department of revenue in the finance ministry.

The committee will receive comments on the first draft from stakeholders and general public till end-July, following which it will rework the guidelines and publish the second draft guidelines by 31 August.

The first draft issued by the finance ministry had sought to remove some of the uncertainty by giving examples of various situations to clarify the circumstances in which GAAR could be invoked. It had also sought to remove investor apprehensions by stating that the onus will be on the tax department. Only income accruing from the start of the next fiscal will come under GAAR, and there will be an income threshold beyond which GAAR will not be invoked.

But it had left wide discretionary powers in the hands of the income-tax department with the language of the draft GAAR.

In a meeting with finance ministry officials earlier this week, investors, including private equity (PE) , venture capital and foreign institutional investors (FIIs), had sought greater certainty in taxation rules and the inclusion of specific tests to determine commercial substance in the GAAR rules. FIIs had asked that they be completely exempted from GAAR.

Investors and analysts welcomed the move.

“The earlier committee was full of revenue officials, whose main objective was to maximize penal tax revenues," said Mahendra Swarup, president of the Indian Private Equity and Venture Capital Association. “This is a more balanced committee and should address genuine concerns of long-term FDI (foreign direct investment) investors and make GAAR investor friendly. The committee should go beyond GAAR and look into other taxation issues as well."

Nearly 90-95% of the investments by PE and venture capital funds could come under the GAAR net as they are routed through Mauritius to benefit from the double tax avoidance agreement that India has with that island nation.

“The committee is well balanced," said Uday Ved, head of tax at audit and consulting firm KPMG. “All the members in the earlier panel were from the ministry and the tax department. "

remya.n@livemint.com

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