Manmohan Singh
Manmohan Singh Reuters

India's Prime Minister Manmohan Singh, who recently took over the charge of the Finance Ministry, has set up an expert committee to review and finalize the controversial General Anti-Avoidance Rules (GAAR), which the foreign investors say are not investor-friendly.

The four-member committee, headed by noted economist and tax expert Parthasarathi Shome, will vet the GAAR draft guidelines and hold consultations on the issue, apart from reviewing the feedback from the stakeholders on the issue.

The Finance Ministry released the draft guidelines on the GAAR last month for feedback from the public. The new committee will receive the feedback on the existing guidelines till July,30, review the feedback and publish the reworked guidelines by August, 31. The committee will further undertake consultations and receive comments before finalizing the report.

The committee is expected to finalize the provisions of the tax code, prepare a road map for the implementation of the GAAR and submit its report on the issue by September 30, 2012.

The GAAR, mooted by former finance minister Pranab Mukherjee, has invited the wrath of the foreign investors. They fear certain provisions in it are detrimental to their investment interests. The GAAR is aimed at catching the tax evaders, who structure and route their investment to the country through tax havens with which India has double taxation avoidance treaties. It has provisions like retro taxing which the foreign institutional investors are weary of. This along with the confusions in the implementation of the GAAR has discouraged foreign investors from investing in India, leading to a slump in the markets.

In an attempt to soothe the investor sentiments, the government has taken out the retro taxing provision in the GAAR and halted its implementation for a year till April 1, 2013.

Manmohan Singh, who took charge of the finance ministry after Mukherjee resigned from the post to contest the presidential elections, has been trying to improve the investor sentiment in India by clarifying the concerns on the GAAR. He has hinted through various statements from the PMO that the GAAR guidelines will be made less stringent to allay the investors' grievances and stakeholders' feedback will be taken into account before finalizing them.

The government has said that there is the need for further discussions on the GAAR provisions. There is a need to have greater clarity on many other fronts. With this in view, the Prime Minister has constituted this Expert Committee which will bring transparency and a high degree of technical expertise to the consultation process, the government said in a statement.

Economists and analysts welcomed the Prime Minister's move as a confidence-building measure.

Possibly, the PM wanted to communicate that there is an independent application of mind. So, he has constituted a new committee which includes some of the most respected bureaucrats, which should help allay any fears that GAAR will be draconian and will bring sanity in the whole process, Dinesh Kanabar, deputy CEO and chairman, tax, KPMG, was quoted as saying by the DNA newspaper.