New Delhi: India's Finance Minister Pranab Mukherjee Monday proposed to defer implementation of a contentious tax evasion law by a year to April 1, 2013 with some changes to soften the implications of its strict provisions, strengthening rupee and restoring some investor confidence in domestic markets.
"To provide more time to both taxpayers and the tax administration to address all related issues, I propose to defer the applicability of the GAAR (General Anti-Avoidance Rule) provisions by one year. The GAAR provisions will now apply to income of financial year 2013-14 and subsequent years," Mukherjee told Parliament while presenting the Finance Bill 2012.
The Bombay Stock Exchange's 30-share benchmark Sensex closed the day at 16,912.71 points, up 0.48%, after hitting a low of 16,513.77, while the rupee closed at 52.965/975 vs Friday's close of 53.47/48.
Earlier March, the government, in the Union Budget 2012-13, had proposed GAAR to come into effect from April 1, 2012, drawing sharp criticisms from both domestic and foreign investors over the uncertainty of the law.
Proposing amendments to GAAR, Mukherjee said that the burden of proving tax evasion will lie with the tax authorities rather than on the tax-payer.
He further proposed to introduce an independent member in the GAAR approving panel to ensure objectivity and transparency. The panel is expected to come up with recommendations for application of GAAR provisions by May-end, he added.
The minister also proposed to allow any resident or non-resident tax-payer the freedom to approach the Authority for Advance Ruling (AAR) for a ruling.
Moreover, clarificatory amendments made in GAAR will not override the provisions made under the Double Taxation Avoidance Agreement (DTAA) which India has signed with 82 countries, including Mauritius, Mukherjee said.
"It (GAAR) would impact those cases where the transaction has been routed through low tax or no tax countries with whom India does not have a DTAA," he added.
A policy note will be issued by the Central Board of Direct taxes to clarify the amendments once the Finance Bill is passed, the minister said, adding that the government is likely to reassess its tax-break treaty with Mauritius.
Mauritius -- a tax haven -- does not have capital gains tax so there is no burden on investors investing money into India through a circuitous route. This has cost India over $600 million every year in revenue, besides incurring the risk of militant groups using it to route money into India.
The Congress party-led United Progressive Alliance (UPA) government has been under tremendous pressure from opposition parties to renegotiate the treaty with Mauritius to solve the black money problem.
Further, the retrospective clarificatory amendments, now under consideration of Parliament, will not be used to reopen any cases where assessment orders have already been finalized, Mukherjee said.
The Budget had proposed a clarification in tax rules to bring under the tax net all cross-border mergers and acquisition deals involving Indian assets or businesses, with effect from 1962 when the rules were written.
However, this indicates that the UK-based telecommunication giant Vodafone will be liable to tax over its $11-billion purchase of Hutchison group's Indian operations in 2007.
Notably, several international trade groups representing over 250,000 firms had voiced their concerns over the proposal to Prime Minister Manmohan Singh in a letter, saying the move may lead global companies to rethink investing in India.
Even the UK's Chancellor of Exchequer George Osborne and US' Treasury Secretary Timothy Geithner expressed their concerns over retrospective amendment to the law with Mukherjee.