A day after the stock markets tanked sharply on fears that FIIs and participatory notes (P-notes) may be taxed for short term capital gains,Finance Minister Pranab Mukherjee today tried to soothe frayed nerves and said that he will examine,and even modify,the proposed General Anti-avoidance Rules (GAAR) if the need arises. He also hinted at a roll back of the excise duty on unbranded jewellery but ruled out going back on the hike in import duty on gold and platinum.
I will examine and modify GAAR as and when required. This is essential for anti-avoidance, the finance minister said in his reply to the general discussion on the Budget for 2012-13 in the Lok Sabha. Earlier,in the Budget,Mukherjee had said the government wanted to introduce GAAR to counter aggressive tax avoidance schemes,while ensuring that it is used only in appropriate cases,by enabling a review by a GAAR panel. On Monday,the proposed provision had spooked the markets on concerns that all short-term capital gains made by FII and P-note investments would be taxed,resulting in a the benchmark indices slipping by around 2 per cent.
On Tuesday,CLSA Asia-Pacific Markets Asias leading brokerage and investment group said that it has taken the position of not issuing fresh P-notes/refrain from increasing its current Indian P-note book on the grounds of uncertainty regarding taxation of these products. It took the position to minimise its tax exposure. Meanwhile,Securities and Exchange Board of India (SEBI) Chairman U K Sinha had said yesterday the government is going to have a new look at tax avoidance,so they they are going to work in that way.
The Sensex recovered over 200 points today. However,the finance ministry sought to dissuade the fears and said that with regards to P-notes,the instrument through which FIIs unregistered with Sebi invest in stock markets,the tax department will have to first prove the intention of tax avoidance before invoking GAAR applicable. Provisions of GAAR will be applicable from April 1.
Further,as the strike by bullion traders entered the eleventh day against the budget proposal that brought them under the excise duty ambit,Mukherjee told Parliament that he will consider the demand for rollback of excise duty on non-branded jewellery. I have no intention of causing any harassment (to small jewellers). As there have been a lot of representations,I am considering it (excise duty on unbranded jewellery). I will come out with an acceptable formulation, he said.
The Budget has proposed an excise duty of 1 per cent on unbranded precious jewellery and doubled the customs duty on standard gold bars,gold coins and platinum to 4 per cent.