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India Tax Panel Sees Rule Delay, Ending Capital Gains Tax

A panel set up by India’s prime minister recommended abolishing taxes on gains from share transfers and deferring a proposal to crack down on tax avoidance that had spooked foreign investors.

The implementation of the General Anti-Avoidance Rules, or GAAR, should be deferred by three years on administrative grounds, according to a draft report released yesterday by the four-member panel led by Parthasarthi Shome, a former adviser to the finance minister. The panel also suggested abolishing taxes on proceeds from the transfer of listed securities, whether they are from capital gains or business income, for both Indians and non-residents.

“Both of these are very significant recommendations,” said Satya Poddar, a Gurgaon-based tax partner at Ernst and Young. “Essentially what they’re saying is that, India is not ready for GAAR and if it is applied, it should be severely constrained.”

Palaniappan Chidambaram, appointed finance minister on July 31, has pledged to clarify tax laws and unveil a plan to contain India’s fiscal deficit as he tries to assuage concerns the nation’s economic outlook is deteriorating. The rupee has slumped 17 percent against the dollar in the past 12 months as slow growth and elevated inflation have hurt investment.

Former Finance Minister Pranab Mukherjee, who resigned in June and is now the country’s president, proposed the introduction of GAAR in March to stop companies from improperly avoiding taxes. GAAR should apply for the assessment year 2017-18, the report said.

Vodafone Ruling

Mukherjee also said in the March 16 annual budget he would seek to change the law to allow the taxation of overseas deals in which an Indian asset is transferred. The announcement followed a ruling in January by India’s Supreme Court that Vodafone Group Plc doesn’t have to pay $2.2 billion in tax on its purchase, conducted offshore, of the local business of Hutchison Whampoa Ltd. in 2007.

Shome told CNBC yesterday that Chidambaram asked him to “look at” the Vodafone tax deal.

The chances the draft suggestions won’t be implemented in the final report are “fairly” remote, Poddar said. The panel will finalize the GAAR guidelines and an implementation plan by Sept. 30, Prime Minister Manmohan Singh’s office said on July 13 via Twitter Inc.’s microblogging service.

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