Saturday, June 30, 2012

Grrr over GAAR and then purr Hint of course correction

Grrr over GAAR and then purr 
Hint of course correction

New Delhi, June 29: Late last night, well past lights-out in North Block and the witching hour of primetime news, the finance ministry put out draft guidelines setting out, among other things, an unspecified monetary limit to General Anti-Avoidance Rules (GAAR) from the next financial year.

At a minute past 10 this morning, barely into log-in time at North Block, a terse disclaimer was attached to the new guidelines: "These have not been seen by the Prime Minister and will be finalised with the approval of the Prime Minister, who holds the finance portfolio, only after considering the feedback received."

Bureaucratic bungling? A corporate depth-charge loaded with implications for the controversial retrospective tax on Vodafone? Or the old finance regime of Pranab Mukherjee springing a clanger on the incumbent one headed by Manmohan Singh? Why, asked Murli Manohar Joshi of the BJP sharply, had the Prime Minister chosen to distance himself from the finance ministry release; are there differences within the government?

None of the above, the government and the Congress protested in unison.

GAAR, the inelegant acronym, stands for a highly contentious measure designed to ferret out tax dodgers. GAAR aims to stop domestic and foreign investors from using elaborate cross-country, multi-layered corporate structures and strategies to get round tax obligations by exploiting provisions in the double taxation avoidance treaties that India has signed with 83 countries.

More specifically, it seeks to stop unscrupulous elements from funnelling investments into the country through Mauritius and taking funds out in the form of dividends without having to pay any tax. GAAR is not specifically linked to the Vodafone dispute but the two have some overlapping points.

The implementation of GAAR has been put off till April next year and it will in all probability come into effect after Parliament passes the Direct Tax Code Bill — the mother legislation of which it forms a part.

"Do not read too much into it (the PMO clarification)," pleaded finance secretary R.S. Gujral in the face of the rebuff from his new boss.

Gujral added: "Obviously the final guidelines will be (framed) after consultation with the PMO.… Suggestions from stakeholders will be taken into consideration and, finally, it has to be decided by the minister in charge."

The finance ministry has invited stakeholder comments on the draft rules till July 20. The draft guidelines on GAAR said there would be a monetary limit to decide which transactions would come within the ambit of GAAR. The limit wasn't spelt out. Experts believed that if this was low, it would give the taxman enormous discretionary powers to open investigations against investors routing their money into the country through so-called tax havens like Mauritius and the Cayman Islands.

"Imaginary hairsplitting," cried Congress spokesperson Manish Tewari when asked if the PMO's caveat had exposed differences between Mukherjee and Singh. "The attempt to show a difference in their approaches is not only unnecessary but illogical. I am denying it absolutely and explicitly."

The PMO moved to rubbish any suggestion that the old dispensation in the finance ministry was working at cross-purposes with the new one. "At worst, this could be a case of over-reach," said a PMO official, "someone trying to prove to the PM they were working hard. It was a draft put out and that is what we have underlined; nothing more to it."

But such is the air of drift and leadership deficit gathered over UPA II that even deniable speculation gains quick currency — if the finance ministry and the PMO are both saying it was a draft and nothing more, went the question, why did the PMO have to say anything at all? Did North Block babus jump the gun on releasing the draft when due process suggested they get the nod from the boss in South Block? Or was the goof-up more than just procedural? Was it that the new finance minister would have wanted the draft itself framed differently? Nobody's answering.

What's increasingly plain as Singh settles into his favoured brief, though, is that the economy will begin to chart a changed, and probably speeded, course following Mukherjee's departure. It won't happen all of a sudden, officials caution, or radically but incrementally in the short and mid-term.

"Pranab Mukherjee and Manmohan Singh come from different worldviews and that will manifest itself," a senior official in the PMO said. "But remember that as Prime Minister, he has also defended Mukherjee's budget, as he should have. Changes will come but slowly, subtly. Don't look for disapproval of what happened under Mukherjee, look for course correction."

The key area of concern at the moment, sources said, is "shaken investor confidence" which Singh is keen to set right on a priority basis. Not enough was being done on that front under Mukherjee, they suggested. "We cannot be radical for a combination of reasons — there is the issue of cabinet responsibility and the requirements of coalition politics — but we have to start making the right noises loudly in order to reassure investors and the markets," a source said.

The sources would not speculate on the future of GAAR, ushered in by Mukherjee, but underlined the "dire need" for investment. "The economic imperatives have changed since GAAR was formulated in its initial form. We need all kinds of investment to put the economy back on the rails and the Prime Minister is going to push hard in that direction."

The Prime Minister's urgency is manifest in his high-energy return to the finance portfolio. The new buzz could partly have powered the 400-plus feel-good zoom on the stock markets today. In the three days that he has been back as boss of the economy, Singh has taken more than a dozen meetings with top officials and advisers, identified time-bound targets and fixed responsibility anew.

Daily reports are now being sought from finance mandarins, and progress will be monitored each evening by the Prime Minister's principal secretary, Pulok Chatterjee. Chief economic adviser Kaushik Basu, who looks set for a term extension, has been tasked with co-ordinating between the finance ministry and the PMO.

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  • Grrr over GAAR and then purr

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