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India defers controversial tax-haven rules to 2016

In this photo taken on Nov. 17, 2010, Indian rupee notes lie inside the cash counter of a retail shop in Mumbai. India is especially keen to crack down on tax avoidance on foreign investment via Mauritius.

Rajanish Kakade/AP

India has decided to defer controversial rules intended to fight tax evasion for two years, the finance minister announced on Monday, a move which experts said would help ease foreign investor concerns.

The General Anti-Avoidance Rules (GAAR), introduced in last year's budget to curb evasion through tax havens, will now be introduced from April 1, 2016 on the recommendation of a government panel.

The rules, which had been criticized by several experts as a money-grabbing exercise by a government battling to curb a widening fiscal deficit, were originally due to come into force in 2014.

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Indian shares closed at a two-year-high, rising 1.23 per cent, or 242.77 points, to 19,906.41.

The tax rules will apply only to those foreign investors who seek to take advantage of the double taxation avoidance treaties which India has with different countries, Finance Minister P. Chidambaram told reporters in New Delhi.

Under the proposed new rules, investments made before Aug. 30, 2010 will not come under GAAR. "No investor should have any apprehension about their investments in India," Mr. Chidambaram said.

India is especially keen to crack down on tax avoidance on foreign investment via Mauritius. About 40 per cent of its foreign direct investment inflows are currently routed through the island nation.

"The modifications that we have done are fair, non-discriminatory, just and strike a balance between interest of revenue and interest of investors," Mr. Chidambaram said.

Foreign investor sentiment had turned more negative last year on concerns that Indian tax laws were turning increasingly hostile towards overseas companies.

But experts said Monday's announcement was likely to improve sentiment.

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"Much of the uncertainty relating to GAAR and how they would be applied have been clarified," said Nick Paulson-Ellis, country head of research firm Espirito Santo Securities.

One of India's top businessmen and founder of IT outsourcing firm Infosys, N.R. Narayana Murthy, slammed the government over the earlier proposals, which he said soured foreign sentiment and were "like taking a pistol and shooting ourselves."

Mr. Chidambaram has unleashed a series of reforms further to open up sectors such as retail, insurance and aviation to foreign investment in a bid to kick-start growth.

Foreign institutional investors, who started to pump money into Indian equities and debt markets after liberalization in the 1990s, were net investors in Indian stocks worth $24.37-billion (U.S.) in 2012.

India is trying to avert a credit-rating downgrade to 'junk' status from rating agencies amid a widening fiscal deficit.

The once-booming economy has been hit by continuing high interest rates in the face of strong inflation, sluggish exports and slow investment.

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The government last month cut its growth forecast for the current fiscal year ending March to between 5.7 and 5.9 per cent, putting it on track for its worst annual performance in a decade.

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