Enforce rules

Prime minister Manmohan Singh has done well to address the concerns of a section of the financial community by setting up a committee under ICRIER (Indian Council for Research and International Economic Relations) chief Parthasarathi Shome to look into the implementation of the General Anti-Avoidance Rules (GAAR).

  Former finance minister Pranab Mukherjee had  postponed the implementation of the rules, introduced in this year’s budget, to April 2013. He also set up a committee  to study the grievances of  foreign financial institutions (FIIs) which were worried that officials might misuse the powers given to them under the rules. The guidelines given by this committee would now be overridden by the recommendations to be made by the latest one. Since the new committee has a time-bound mandate its recommendations would be available in time for the proposed introduction of the rules.

But there is no case for dumping of the rules altogether which is what some sections want, though it is unstated. There may be concerns about how the rules would affect the inflow of  capital into the Indian market, especially in the context of the weak macro-financial situation. But the FII inflows are not bad even now and the concern is about the nature of money that comes in and  the tax evasion that is known to be widely prevalent. This is what the GAAR had tried to address. Investment through tax havens has been a major problem and the government has been criticised for not taking action to deal with this. There are many other countries which have laws  to address the issue of illegal and sometimes tainted money entering their market through the back door.

The aim should only be to fine-tune the rules, plug the loopholes and reduce the scope for harassment of genuine investors by officials through the exercise of discretionary powers. It has already been clarified that the onus of proof for violation of rules will be with the tax authorities.

But many FIIs, who have operated from tax havens and have benefitted from the lax rules in the country, might expect substantial dilution of the provisions. Even the political authorities in tax havens might try to put pressure on the government. The move to introduce rules based reforms to protect the interests of the country, should not be abandoned.