India’s U-Turn On Tough Tax Laws

India’s controversial bid to crackdown on people avoiding tax has suffered a setback – and the new laws are now to sit on the backburner for two years.

The General Anti-Avoidance Rules (GAAR) targets foreign firms and investors from washing money through tax havens, particularly in Mauritius.

One of the problems is that around 40% of India’s foreign investment comes through Mauritius and many foreign investors raised concerns about the reach of the rules.

As a result, a committee was formed to investigate their worries, including fears that GAAR would allow the taxman to harass foreign investors.

That committee has now reported and the rules will change so that any foreign institutional investor (FII) which is being run by non-resident Indian citizens will be exempt from reporting their transactions.

Double tax issues

This is to avoid the institutions from having to pay tax twice – in India and the country where the business is based.

This means that GAAR will not now be brought in from April 2014 but 2016.

The news was welcomed by analysts and the Indian stock market rallied by 1% as a result.

India’s Finance Minister P Chidambaram said: “We have considered the factors and circumstances and decided to delay the introduction of the rules.

“As a result we have reviewed GAAR and will not apply to FII’s and non-resident investors.”

He added that GAAR would not be used to tax the same income twice but he warned would override any tax treaty if an arrangement was considered an artificial transaction only concerned with avoiding taxes.

The minister also disclosed that the tax treaty between India and Mauritius was under review because Mauritius does not tax capital gains.

Signal to investors

This has, he said, led to the misuse of the treaty by many individuals and businesses.

The new rules also include a minimum £345,000 threshold before GAAR would apply – taking a large number of taxpayers out of its net.

When India announced new tough measures for collecting taxes, an outcry was sparked from international companies that led to a drop in investment in the country.

A spokesman for brokerage firm Emkay Global said: “The signal from the government in making this decision is that attracting capital from abroad is imperative for the Indian economy and to help fund the current budget deficit.”

He added that by delaying GAAR, the decision sits alongside recent announcements that the government is opening parts of the economy to foreign investors.