Expert panel wants GAAR deferred by 3 years

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A controversial set of laws to stop tax avoidance in India should be deferred until 2016, an advisory panel set up by Prime Minister Manmohan Singh to examine the rules said on Saturday, a move likely to cheer investors.

The general anti-avoidance rules (GAAR), first proposed in the federal budget in March, target firms and investors routing money through tax havens.

Foreign investors, already wary about investing in India where economic growth has slowed to its slowest in almost a decade, have said they are worried the laws might be misused.

"The investment climate in the country has suffered (a) serious setback and investors' confidence has been hit mainly because of the concerns over the impact of retrospective tax laws and GAAR," said the panel, a consultative body whose recommendations are not legally binding.

"GAAR is an extremely advanced instrument of tax administration -- one of deterrence, rather than for revenue generation," the panel wrote in a report posted on the Finance Ministry website, suggesting the government does not begin enforcing the rules until 2016.

The government wants the rules to come into effect in the financial year starting April 2013. Should that happen, they should apply only to investments made after April 1 that year, the panel suggested.

Parliament passed the GAAR laws in March when tabled as part of the budget, but the government said in May, in response to an investor backlash, that it would defer implementation of GAAR until 2013.

On Tuesday, Finance Minister Palaniappan Chidambaram urged officials not to hound the country's taxpayers, despite pressure to meet annual tax targets.