Monday, January 14, 2013

Bending back to please - Deferring the GAAR

As expected, the Government has deferred implementing the General Anti Avoidance Rules by two years - in a bid to 'allay fears of foreign investors and boost sagging FDI inflows'. The Deputy Chairman of the Planning Commission says that this 'will boost the investment climate'

The implication is that FDI inflows have been / are structured to avoid tax payments. It also implies that tax avoidance - the Mauritius route etc is viewed in a benign fashion , while the honest tax payer is penalized. This kind of economic policy making hurts.

Justice J S Verma's observation on the SC judgement in the Vodafone case clearly stresses this point . He says "The effect of benefiting a corporate is to cast a higher tax burden on the common man and when you uphold an illegal tax avoidance, then you cast a higher tax burden on the honest tax payer". True.

While the markets gave a thumbs up with the Sensex gaining 240 points, what is still not clear is how postponement of GAAR will boost sagging FDI inflows. It is not that there is a long queue of investors dying to invest in India and wanting only this change to be done. And notwithstanding what the western schooled economists say, it is plain common sense that FDI is no panacea for economic evils in this country and so, the question is whether the Government needs to bend back to please.

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