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India Tries To Delay Tax Clamp Down In Fear Of Downgrade

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India Tries To Delay Tax Clamp Down In Fear Of Downgrade

India has proposed the deferment of earlier plans to implement a tax clamp down. This has been done through a panel which was selected by the prime minister.  Members of the panel recommend a three year deferment.

Investors have taken the proposal as welcome news, citing that the move may be instrumental in boosting capital inflows into the country. This comes amid growing concerns over the possibility of a rating downgrade. The fears of the downgrade have swept across the country’s financial market, with watchers noting that the country risks receiving a junk rating.

The proposed three year delay was also well received by the country’s top executives. Ananth Narayan shared positive insight on the news. “It is definitely good news and a sentimental boost,” he remarked. Narayan is the Managing director of Standard Chartered PLC (LON:STAN) (LON:STAC) in Mumbai, and also the co-head of wholesale banking at the establishment.

Earlier plans to crack down on tax avoidance are traceable to the General-Anti Avoidance Rule, which was drafted on March 16th by Pranab Mukherjee, the head of state and the former finance minister. At the time of implementation, worries were predominant, and analysts noted that the rule would heavily impact commitment from foreign investors.

Indeed, the rule spooked foreign investors. Most investors demonstrated their concern, noting that the rule would arbitrarily apply to their stock and bond holdings. In fact, April and May was marked by net selling, as global funds sold most of their Indian stock. This move not only demonstrated the growing fears among global investors, but also pushed the Indian economy towards the curb. The Indian rupee, at the time, sagged to a record low, while credit rating firms like Standard & Poor cut the sovereign credit slant to negative. To aggravate the situation, the country’s prime minister- Manmohan Singh- had been caught up in graft allegations and unending pressure following missed budget targets, and an unprecedented current account deficit. This string of economical and political problems has been influential in stirring the fears of a downgrade.

Following the threat of a downgrade, India has perhaps, proposed the delay in the hope of enhancing capital inflow and improving the economic outlook

Favorable environment

Not only did a prominent member of the panel advocate for the stamping out of taxes from the transfer of listed securities, but the committee also maintained that it would draw a clear distinction between legal tax mitigation and downright tax avoidance

This series of events demonstrates India’s desires to create a favorable environment for both local and global investors.

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Sheeraz Raza

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