Japan demands rollback of GAAR

Deputy Primne minister and Finance Minister Taro Aso to meet P Chidambaram in May

Japan wants India to roll back the General Anti-Avoidance Rules (GAAR), which former finance minister Pranab Mukherjee proposed in the 2012-13 Budget to check tax avoidance. It also wants India to review the proposal to amend the Income Tax Act with retrospective effect, which was also announced last year.

Taro Aso, Japan’s deputy Prime Minister and finance minister, will take up these two issues with Indian Finance Minister P Chidambaram during the Asian Development Bank’s (ADB) annual meeting of board of governors in May, a senior Japanese government official told Business Standard.

This assumes significance considering Japan’s huge investment in India across sectors ranging from automobiles to electronics. Ever since Chidambaram took over as finance minister in August last year, international investors have been urging him to review the controversial proposals made by his predecessor Mukherjee.

“GAAR and retrospective tax amendments are a matter of serious concern for us. We were expecting the Chidambaram to announce something to soothe our investors. The tax administration system in India is getting very aggressive,” said the official, adding that they hoped Chidambaram would accept some of the proposals made by the expert committee on GAAR, headed by Parthasarathi Shome.

The official also complained that Chidambaram did not accept some important recommendations made by the expert committee on tax liability of foreign entities. Japan is also upset on the recent whip by the government on transfer pricing issues.

While Shome committee has recommended deferring GAAR for three years, the finance ministry has postponed it for two years.

Recently, Chidambaram had said that the government would approach Parliament on retrospective tax amendments only after the settlement of $2-billion tax imbroglio with British telecom major Vodafone Plc is approved by the Cabinet.

Japan is one of the leading investors in India. Major Japanese companies with operations in India include Toyota, Nissan, Maruti Suzuki, Hitachi, Canon and Nikon. Canon India had been mulling to set up their manufacturing unit in India for a long time, but it could not, due to India’s unfavourable taxation system. It currently imports its products from southeast Asian countries.

Japan’s overseas development assistance (ODA) has remained a significant part of Indo-Japanese economic relationship. Japan has also made huge investments for the Delhi-Mumbai Industrial Corridor (DMIC) project.

On the India-Japan Comprehensive Economic Partnership Agreement (CEPA), signed in August 2011, the official said that it has not made much impact for Japanese exports to India. It is aggressively looking to take advantage of the good trade pact that India signed with the Association of Southeast Asian Nations (Asean) to gain more access into Indian market.

Japan is also planning to make inroads to Myanmar to develop its infrastructure in collaboration with India.

Prime Minister Manmohan Singh is to visit Tokyo later this year to meet his counterpart Shinzo Abe.

Japan is India’s fourth largest investor. Foreign direct investment (FDI) from Japan reached almost $2 billion in 2011-12 from $1.56 billion in 2010-2011. Investment from during the April-December 2012 period reached $1.62 billion. Bilateral trade in 2011-2012 swelled to $18.31 billion from $13.82 billion in the previous year.

According to a January report by United Nations Conference on Trade and Development (Unctad), FDI into India declined by 13.5 per cent from $31.5 billion in 2011 to $27.3 billion in 2012.