One of the first major decisions taken by Prime Minister Manmohan Singh, after he took charge of the Finance Ministry in July 2012, was to scrap the draft of General Anti-Avoidance Rules (GAAR) and constitute a new committee to propose a new draft after consulting all ”stake holders”.
One of the first major decisions taken by Prime Minister Manmohan Singh, after he took charge of the Finance Ministry in July 2012, was to scrap the draft of General Anti-Avoidance Rules (GAAR) and constitute a new committee to propose a new draft after consulting all ”stake holders”. The proposal of GAAR was made in the Union Budget of 2012 and relates to plugging existing loopholes which allow big capitalist institutions to avoid paying taxes worth billions of dollars every year, on their foreign investment transactions. As soon as the budget announced the proposal for GAAR, the big global financial institutions showed their displeasure by withdrawing $ 8 billion within one month from the Indian stock market, leading to a big drop in share prices.
FICCI, an association of big Indian capitalists, openly came out opposing the draft rules and asked the implementation of GAAR to be deferred until new rules acceptable to foreign and Indian monopoly capitalists are framed. It declared that GAAR will lead to a drop in the flow of foreign capital into the country; it argued that ‘reforms’ are required to encourage more foreign capital inflows. Acting on behalf of the foreign monopoly capitalists, Singapore Prime Minister Lee Hsien Loong and the foreign minister of Mauritius urged the Indian government to desist from implementing the proposed GAAR. Most foreign investments in India’s capital market are routed through these two countries, which together account for about 51 per cent of total foreign capital inflows.
During his visit to India early this month, Lee Hsien Loong told reporters that the business environment in India had become “complicated” for investors (due to announcement of introduction of GAAR). Before that the foreign minister of Mauritius had complained that the proposed GAAR was unilateral and against the terms of the India-Mauritius Direct Tax Avoidance Agreement (DTAA).
The DTAA between India and Mauritius specifies that the tax on profits will be paid by the company where it is resident. So the profit may be made in India but tax will not be paid here. Further, the government of Mauritius has zero capital gains tax. So the foreign company, interested in investing in India, is registered in Mauritius and thus becomes its resident. After that any profit made by it on sale of shares in India becomes free of tax. Foreign capitalists invariably prefer to make investments through tax havens like Mauritius so that can totally avoid paying any tax on the profits they make in foreign countries. A large part of the money that Indian capitalists have hoarded abroad also finds its way into India while continuing to be outside the tax net.
The introduction of GAAR would have made it mandatory for the tax department to impose a capital gains tax on all foreign investors in the Indian market. Hence, both foreign and Indian capitalists are opposing GAAR and want it to be either scrapped or diluted to a point that they can continue to enjoy zero tax on their profits. The pressure put by foreign and Indian capitalists made then finance minister Pranab Mukherjee announce a number of concessions on GAAR, like postponing the date of implementation to 1 April 2013 from 1 April 2012, and putting the onus of proof of tax avoidance on tax department but this did not satisfy the capitalists. By getting the old draft scrapped, they have made sure that a new draft suitable to them will get adopted, so that they can continue to avoid paying taxes on their profits, while the working class is squeezed by high taxes and soaring prices of essential commodities.