Bloomberg News

India Delays Tax-Avoidance Clampdown to Spur Investment Inflows

January 14, 2013

Finance Minister Palaniappan Chidambaram

Finance Minister Palaniappan Chidambaram said the so-called General Anti-Avoidance Rules, or GAAR, will take effect the year starting April 1, 2016. Photographer: Tomohiro Ohsumi/Bloomberg

India delayed a clampdown on tax avoidance until 2016 after the plans spooked foreign investors and threatened to hamper a push to revive growth.

The so-called General Anti-Avoidance Rules, or GAAR, will take effect the year starting April 1, 2016, Finance Minister Palaniappan Chidambaram said at a briefing in New Delhi today. A panel set up by the government to review the measure, which was due to be enforced from 2013, recommended the delay.

India’s recent push to lure foreign investment to revive an economy facing budget and trade deficits has been hampered by concern that the nation’s tax laws are becoming more hostile. The government has stepped up efforts since mid-September to steady the rupee and spur growth, which the Finance Ministry estimates will be at a decade-low in 2012-2013.

“It’s a positive move,” said Deven Choksey, managing director at K.R. Choksey Shares & Securities Pvt. Ltd. in Mumbai. “The announcement will help sustain capital inflows in 2013.”

The rupee, which has declined 5.6 percent against the dollar in the past year, strengthened 0.4 percent to 54.555 per dollar as of 1:05 p.m. in Mumbai. The BSE India Sensitive Index (SENSEX) of stocks rose 0.9 percent. The yield on the 10-year bonds due June 2022 fell to 7.80 percent from 7.87 percent on Jan. 11.

Global funds turned net sellers of Indian stocks in April and May after tax changes stoked concern that investments in Indian assets, which are sometimes routed through third countries to reduce levies, would face higher charges.

Panel Recommendations

Prime Minister Manmohan Singh in July appointed a committee led by Parthasarthi Shome to review the clampdown. President Pranab Mukherjee, then the finance minister, introduced the anti-avoidance step in the March 2012 budget, before delaying implementation to 2013.

Chidambaram said today the major recommendations of the Shome panel have been accepted. The panel has separately analyzed another Mukherjee change allowing for retrospective application of changes to certain tax laws.

A Finance Ministry official with direct knowledge of the matter said last week that India has written to Vodafone Group Plc saying it’s ready for talks to settle a $2.2 billion dispute arising from such retroactive levies. That spat has also cast a shadow on India’s attractiveness to foreign investors.

Singh has overhauled economic policies since mid-September, opening industries from retail to aviation to more foreign investment and curbing fuel subsidies to tackle a budget deficit.

The steps helped to spur inflows into stocks, with foreigners buying a net $1.45 billion this year, more than three times the level at the same time in 2012.

The government is trying to avert a credit-rating downgrade to junk status. Asia’s No. 3 economy may expand as little as 5.7 percent in the 12 months through the end of March, the weakest since 2002-2003, according to Finance Ministry.

To contact the reporters on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net; Siddhartha Singh in New Delhi at ssingh283@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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