People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 36

September 09, 2012




Appeasing Foreign Speculators


IN his speech introducing the 2012-13 budget, the then finance minister Pranab Mukherjee had declared his intention to introduce a General Anti-Avoidance Rule (GAAR) to counter “aggressive tax avoidance schemes”. What GAAR means is that even if a transaction appears to be legally valid, if it is entered into for the sole purpose of tax avoidance, then the Indian tax authorities can deny tax benefit to the concerned entity. GAAR had become necessary not only because of the enormous tax revenue lost to the country, but also because India had acquired the dubious reputation, normally associated with “banana republics”, of being a country at whose tax administration multinational corporations could cock a snook with impunity.  The bulk of India’s foreign capital inflows for instance was routed through Mauritius, which is a “tax haven”, but with which India has a double tax avoidance treaty, stipulating that taxes must be paid in the country of domicile (not operation), so that no tax need be paid on gains made in India on FDI or FII so routed!


Even the Indian Supreme Court has been benign towards such malfeasance:  in 2003 a two-judge bench of the Court had held the adoption of this Mauritius route as a legitimate act of “tax planning”! And more recently when HTIL sold 67 per cent of an Indian company’s share (Hutch Essar Limited) to Vodafone and the Indian tax authorities asked Vodafone to pay the capital gains tax on this sale (which it could then pass on to HTIL), the Supreme Court upheld Vodafone’s contention that it was not liable to tax since it had purchased the shares from a holding company located in Cayman Island!


Mukherjee’s speech expectedly aroused a howl of protest from MNCs and Foreign Institutional Investors, so much so that Mukherjee himself got cold feet and announced that GAAR would come into effect only from April 1, 2013. After his departure, the new finance minister Chidambaram put the proposal on hold, while prime minister Manmohan Singh appointed yet another “slot machine” committee (where you get the report you want) headed by Parthasarathi Shome, a former IMF employee who is currently the director of the most overtly neo-liberal institute in the country, the ICRIER, to go into the introduction of GAAR.


The Shome Committee has expectedly produced a report, hailed by the Wall Street Journal and other mouthpieces of finance capital, which recommends that the introduction of GAAR should be kept in abeyance for three more years beyond Mukherjee’s deadline, ie until April 1, 2016! The apparent excuse for doing so is that GAAR needs to be applied “intelligently”, and it will take that long before the Indian tax authorities acquire the requisite intelligence!


The Shome Committee does not stop there. It recommends that GAAR should be applied only in cases where the tax liability exceeds Rs Three crores, ie the profit on which tax is to be paid exceeds a threshold of 10 crores, by which logic if profits are shown to be dispersed, through “transfer pricing”, then GAAR would never be applied to them anyway. Likewise, if HTIL had sold HEL’s shares not in one lot, but in a staggered manner over a period of time, then it would simply have escaped GAAR totally.


But Shome does not stop there; he advocates an abolition of the capital gains tax altogether! The Manmohan Singh government has in any case done away with taxing what are called “long term capital gains” (ie when securities are held for a minimum period); and even the “short term capital gains” at present are lightly taxed, at a mere 10 per cent. But now the idea is to do away with this tax altogether. This is scandalous since even true-blue bourgeois theorists draw a distinction between “enterprise”, which they laud, and “speculation” which they decry. “Enterprise” earns “profit” while “speculation” earns “capital gains”. In India henceforth while profits will be taxed, capital gains will not be, which is tantamount to penalising “enterprise” and encouraging “speculation”, a situation that even a bourgeois theorist would find utterly bizarre.


That however shows the absurdity of the Manmohan Singh government’s thinking. It is so keen to start another stock market “bubble” which it thinks will stimulate growth, that it wishes to make every possible effort, no matter how bizarre it may sound, to attract speculative finance capital into the country. And it sets up “slot machine” committees to legitimise every such effort, no matter how outlandish and how ethically repugnant such effort may be. The story, however, is by no means going to end here. All these efforts, in the context of the current world capitalist crisis, will come to naught; so, we shall be seeing even more desperate and reprehensible measures to appease foreign speculators on the part of the Manmohan Singh government.


(September 5, 2012)