NEW DELHI—The Indian government Monday postponed by a year the implementation of new rules cracking down on tax avoidance, in the first sign that it is heeding criticism that recent tax proposals are sapping investors' confidence.
Finance Minister Pranab Mukherjee told Parliament that the proposed General Anti-Avoidance Rules, which will allow tax authorities to scrutinize any deal they think has been structured to evade taxes, will be implemented from April 1, 2013. He added that government agencies now will have to prove wrongdoing, reversing an earlier proposal that placed the onus on companies to prove their innocence.
Mr. Mukherjee gave no indication the government planned to alter a second tax proposal to impose a retroactive capital-gains tax on some international transactions that exchange Indian assets.
The postponement follows weeks of criticism from investors and the business community, which had combined with broader concerns about the sustainability of India's economic growth.
Mr. Mukherjee also halved the long-term capital gains tax on private equity investors, to 10%.
Critics had complained that the anti-avoidance proposals were vaguely written and could be broadly applied to include all foreign funds investing in Indian capital markets. The Bombay Stock Exchange's benchmark Sensex index reversed early declines to end Monday at 16912.71, up 0.5%, in contrast to other major Asian markets, which fell. The rupee strengthened against the dollar.
Finance Minister Pranab Mukherjee told Parliament that the proposed General Anti-Avoidance Rules, which will allow tax authorities to scrutinize any deal they think has been structured to evade taxes, will be implemented from April 1, 2013. He added that government agencies now will have to prove wrongdoing, reversing an earlier proposal that placed the onus on companies to prove their innocence.
Mr. Mukherjee gave no indication the government planned to alter a second tax proposal to impose a retroactive capital-gains tax on some international transactions that exchange Indian assets.
The postponement follows weeks of criticism from investors and the business community, which had combined with broader concerns about the sustainability of India's economic growth.
Mr. Mukherjee also halved the long-term capital gains tax on private equity investors, to 10%.
Critics had complained that the anti-avoidance proposals were vaguely written and could be broadly applied to include all foreign funds investing in Indian capital markets. The Bombay Stock Exchange's benchmark Sensex index reversed early declines to end Monday at 16912.71, up 0.5%, in contrast to other major Asian markets, which fell. The rupee strengthened against the dollar.
Still, analysts said the move wouldn't be enough to revive interest among foreign investors and companies in putting money into India.
Critics have slammed the proposal for a retroactive capital-gains tax as contrary to international taxation practices, and a legislative reversal of a Supreme Court decision earlier this year that said such tax on such deals wasn't allowed. The proposal would affect transactions such as Vodafone Group PLC's $11-billion purchase in 2007 of a majority stake in an Indian mobile company.
Prospects for the broader Indian economy are weighing on investors. India's economic growth slowed to 6.9% growth in the year ended March 31, down from more than 8% in the previous two years.
India's current-account deficit—the difference between exports and imports of goods and services—has been widening, and currently stands at about 4% of gross domestic product. India's budget deficit has also been rising, to 5.9% of GDP in the year ended March 31, higher than the government's 4.6% target.
Last month, ratings firm Standard & Poor's warned it may downgrade India's long-term debt rating to "junk," if India didn't rein in spending and improve its fiscal health. India also has been lax in introducing policy reforms, such as allowing foreign supermarkets to enter into joint ventures, which could boost foreign investment.
"The government has to effectively address issues of current account deficit, fiscal deficit and overcome the perception of policy paralysis to restore investor confidence," said R. K. Gupta, managing director of Taurus Asset Management Co., a Mumbai-based money-management firm. "Just on today's announcement, foreign institutional investors won't come in aggressively."
