All eyes will be on finance minister Pranab Mukherjee to soothe jittery currency and equity markets and temper investors' anxiety over the controversial General Anti-Avoidance Rule (GAAR) and retrospective tax proposals that seek to empower authorities to crack down on transactions structured to avoid paying taxes.
Mukherjee will reply to the debate on finance bill 2012 in Lok Sabha this week. Indications are that he may modify GAAR proposals and waive penalties on old deals that may include Vodafone's 2007 acquisition of Hutchison's mobile assets in India.
"Waiver of penalty for cross-country mergers and acquisitions involving Indian assets that took place before April 1, 2012 is being considered," a source said. This could bring down Vodafone's tax bill to Rs. 8,000 crore from Rs. 20,000 crore.
The GAAR proposal has upset foreign investors, who fear a substantial rise in tax outgo on their investments in Indian assets.
Sources said the government is likely to set a threshold of about Rs. 10 crore for invoking anti-avoidance provisions - a move that will exclude a large number of small firms and individuals from the rule.
Mukherjee has proposed the GAAR provisions to tax deals and income that are specifically structured in layers to avoid paying taxes
GAAR can potentially affect even individuals, if tax inspectors conclude that their remuneration has been structured in a particular way only to avoid paying taxes. "Fixing a threshold will limit the impact of GAAR on individuals and small firms," the source said.
"GAAR raises the sceptre of even the most commonplace and legitimate transaction such as court-approved mergers being held to be devices for tax avoidance," said Percy Billimoria, senior partner, AZB and Partners.
"There is also concern over the onus of proof. If the department alleges that a transaction is a device to avoid tax, the onus should be on it to show why that is so," Billimoria said.
"We believe there are concerns regarding the taxability of foreign investors," said Dipen Shah, head of fundamental research, Kotak Securities. "Further clarity on these issues from the government will be a pre-requisite for markets to move up."