India seeks to ease investor fears on tax-avoidance rules

The Indian government has issued draft guidelines to clarify controversial tax-avoidance rules that spooked foreign investors and prompted a capital outflow at a critical time for the economy. The guidelines released late Thursday recommended that the tax provisions be applied from April next year -- rather than retroactively as some had feared -- and that the onus of proving any wrongdoing lay with the authorities. The clarifications from the Central Board of Taxes came two days after Prime Minister Manmohan Singh took over the reins of the Finance Ministry following the resignation of Pranab Mukherjee. In a meeting with top Finance Ministry officials on Wednesday, Singh had specifically mentioned "problems on the tax front which need to be addressed." The General Anti-Avoidance Rules (GAAR) introduced in this year's budget had been widely criticised both at home and abroad, with many seeing it as a money-grabbing exercise by a government struggling to rein in its budget deficit. In order to avoid the "indiscriminate application" of the tax-avoidance rules, Thursday's guidelines suggested a monetary threshold for invoking the GAAR provisions -- but did not recommend a precise figure. They also said GAAR should not apply to foreign institutional investors who refrain from taking advantage of double tax avoidance treaties to invest in India. Finance Secretary R.S. Gujral said the draft guidelines will be open for comments for 15 days, after which a final version would be issued.