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GAAR application deferred by a year, amendments to provisions announced
May, 07th 2012

After weeks of protest by both foreign and Indian investors, FM Pranab Mukherjee on Monday announced that the General Anti-Avoidance Rules (GAAR) will be applied from 2013-14 onwards, deferring its application by a year.

Speaking on amendments in the Finance Bill in parliament, Mukherjee also said the onus of proof will lie with the tax authorites and that the proposed retrospective amendment of income tax laws will not override DTAAs with 82 countries.

The Finance Minister also said that the capital gains tax on private equity will be halved to 10 per cent.
"Deferment of GAAR is needed to bring about more clarity in guidelines and (put in place) the complete framework after stakeholder consultations to ensure its smooth implementation," said Rahul Garg, leader (direct tax), PwC India to ET.

A deferment of GAAR can perk up sentiment in general, but the overall mood towards emerging markets is so weak there may not be a flood of investments, says Abheek Barua, chief economist, HDFC Bank. Under the GAAR regime, authorities can deny tax benefit to any arrangement that is entered into primarily to avoid tax. The rule will almost certainly tax foreign institutional investors that route portfolio investments into India through token operations in Mauritius with which India has a tax treaty.

Avalanche of Criticism

India's economic growth dropped to its lowest after the 2008 financial crisis, expanding just 6.1% for the quarter ended December 31, 2011, way below the near-9% between 2004 and 2008. Capital formation growth has turned negative while the current account deficit is close to 4%, regarded as a danger zone by economists.

On Friday, a slowdown in capital flows prompted the Reserve Bank of India to raise the interest rates banks can offer nonresident Indians to encourage them to bring in dollars. The Sensex ended below the 17,000 mark for the first time since January 24, 2012, closing at 16,831 -down 320 points.

The avalanche of criticism has evoked a mix of incredulity and anger among finance ministry mandarins. "There is an attempt to pull India down. It is fashionable to criticise the government," said Economic Affairs Secretary R Gopalan, who nonetheless conceded that inflows will have to increase and investors reassured. "We will talk to foreign investors," he told ET in an interview on May 2. Another finance ministry official described the barrage of criticism as an attempt to 'bla

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