India Set to Release GAAR Final Draft

November 20, 2012 Posted by India Briefing Reading Time: 3 minutes

GAAR likely to be postponed to April 2016 in effort to restore investor confidence in the market

Nov. 20 – The Indian government is likely to announce the final draft of the General Anti-Avoidance Rules (GAAR) within the next 10 days, according to the country’s Finance Minister P. Chidambaram.

“A decision has been taken on GAAR,” Chidambaram said. “The draft has been sent to the Prime Minister. Hopefully, the decision will be made public in the next 7-10 days.”

GAAR, introduced in the 2012-13 Budget with the aim to prevent tax evasion, has raised widespread concerns from foreign investors. Uncertainties in the investment environment brought up by the regulation have dampened the confidence of foreign investors in the market. Some of them have pulled out their funds in India to “fly to safety,” and by April this year, US$926.8 million had flown out of the market.

This negative reaction from foreign investors has made the regulation quite controversial, especially at a time when confidence of foreign investors is of crucial importance to the country’s economic development. India is experiencing the slowest economic growth in the past nine years, and with its current accounts deficit and the weak performance of the rupee, the county’s economic situation is far from optimistic. Under these circumstances, raising the confidence of foreign investors would be a good way to bolster the market, as foreign investment can bridge the country’s current account deficit, and support a strengthening of the rupee as well as the national stock market.

In response, the government deferred the implementation of GAAR by one year to April 2013 and appointed a committee led by tax expert Parthasarthi Shome to review the country’s GAAR. The committee then largely relieved the concerns of foreign investors by proposing that the implementation of GAAR, which deals with firms and investors routing money through tax havens, should be postponed to April 2016.

The country’s Prime Minister Manmohan Singh also expressed his concern over the negative reaction from investors, when speaking at the Economic Times Awards for Corporate Excellence on November 10. During the event, Singh mentioned that the government has dispelled “gloom and doom” and is working hard to restore investor confidence. He also noted that formal decisions on all issues concerning GAAR will be announced soon.

It is expected that the final GAAR will adopt the opinions of the Shome committee, delaying the implementation of GAAR by three years and abolishing the capital gains tax on selling listed shares.

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