The finance ministry on Tuesday calmed the stock markets, jittery over apprehensions on the implications of the General Anti-Avoidance Rule (GAAR) proposed in the Union Budget. Finance Minister Pranab Mukherjee made it clear the rules were meant to check tax avoidance through complicated deals, and not directed against any particular mode of investment like participatory notes (PNs).
He hinted at changes in GAAR, if required, on the basis of the suggestions of the Parliamentary Standing Committee on Finance on the Direct Taxes Code provisions.
Markets staged a smart recovery in late noon, after ministry officials indicated the government would not particularly target PNs under the new GAAR regulations. The Sensex gained 204.58 points to close at 17,257.36, compared to a fall of 308.96 points in the previous session.
Mukherjee said since he had got the report of the standing committee a bit late, he could not incorporate those provisions in the Budget.
“I have accepted GAAR. I did not have the privilege of examining the recommendations of the standing committee to incorporate those in the Finance Bill, but I will surely examine and modify, as and when it will be required,” he said while replying to the discussion on Budget in the Lok Sabha after the markets closed.
Further, to remove the persisting doubts even after these indications, finance ministry officials will hold a meeting with Sebi chairman U K Sinha and FIIs tomorrow. The idea is to take measures to remove all unfounded apprehensions from the stock markets.
Apprehensions are that PNs may still attract GAAR, if routed through countries like Mauritius, with which India has double taxation avoidance agreements. It is through this island nation that most of the PNs are routed.
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A crucial point where the Budget differs on GAAR with the standing committee is that the panel wants taxmen to take the responsibility of proving a deal is aimed at avoiding tax, while Budget has put the onus on assessee.
Analysts said it would be too tough for an assessee to establish a deal is not aimed at avoiding taxes, since taxmen can always contest his points.
Second, the committee wanted the tax panel deciding on the correctness of a commissioner’s tax avoidance assessment to also have members other than tax officials. However, the Budget has proposed this panel to comprise only tax commissioners and officials of higher rank.