Prime Minister Manmohan Singh will seek within the next two to three weeks to clear up confusion over the General Anti Avoidance Rule, or GAAR, policy that has rattled investor confidence in Asia's third-largest economy, a government official said on Thursday.
Singh plans to issue an "explanatory note" on portfolio investments, an official in his office told Reuters, without giving details about what the statement would say or which tax issues it would address.
However, it is widely known that the prime minister's office was unhappy with the way that former Finance Minister Pranab Mukherjee handled controversial tax proposals that were part of the 2012/2013 budget announced in March.
The proposals to crack down on tax evasion and allow the government to make retroactive claims on overseas deals involving Indian assets sparked alarm in foreign capitals, including Washington, and an exodus of funds from India, although it remains a popular destination for investors.
Singh said at a meeting of economic advisers and top finance ministry officials on Wednesday that "reviving investor sentiment" was a top priority.
He temporarily assumed control of the finance ministry on Tuesday after Mukherjee stepped down to run for President.
"There is a lot of confusion about taxation," said the official in the prime minister's office, adding that Singh's policy clarification could be expected in "two-to-three weeks".
Economists and investors said the tax proposals announced in March were vague and confusingly worded, creating uncertainty at a time when the country needs capital inflows to help plug a widening current account deficit.
Mukherjee sought to placate investors in May by deferring the tax evasion proposal until 2013.
GAAR aims to target tax evaders, partly by stopping Indian companies and investors from routing investments through Mauritius or other tax havens for the sole purpose of avoiding taxes.
Reviving capital inflows
A finance ministry official said the government recognised that a revival of capital inflows would prop up the equity market, bringing retail investors into mutual funds.
This in turn would deter investments in gold and other assets, which widen the current account deficit.
Singh told officials at Wednesday's meeting on the economy that he was concerned that "investor sentiment is down and capital flows are drying up."
He said he wanted to revive the "animal spirit" of an economy that was roaring with growth of well above 9% in the three years before the global financial crisis in 2008-2009.
India's economy is growing at its slowest pace in nine years, the rupee is the worst performing currency in Asia this year, inflation remains high, industrial production has flatlined and the country faces the threat of having its credit rating downgraded to junk.
Many investors and economists blame weak leadership and muddled policies that have failed to curb government spending and alienated many foreign investors.