Finance minister Pranab Mukherjee is both astute and pragmatic in the way he does his politics and negotiates tricky terrain. He did the right thing by postponing the implementation of the General Anti Avoidance Rules (GAAR) to 2013-14. In any case, GAAR was meant to kick in as part of the overall Direct Taxes Code in 2013-14. A wider GAAR panel will now look at rational rules and guidelines that will govern GAAR over the next one year.

Pranab Mukherjee has thus allayed fears of foreign investors that GAAR would be used as an arbitrary tool by the taxman to harass foreign institutional investors (FIIs) investing from tax havens such as Mauritius. The finance minister has also accepted the suggestion made by the Parliamentary Standing Committee on Finance under Yashwant Sinha?s chairmanship that the onus of proving alleged tax evasion must be on the tax authorities and not the FIIs. That is as it should be in any liberal tax system.

Pranab Mukherjee?s political acumen is noteworthy. First, by resolutely standing up to pressures from MNCs (Vodafone) and FIIs, he won the admiration of the Left parties and Left-leaning Congressmen, which is a large contingent. Later, by partly giving in to BJP?s suggestions on changes in the budget proposals he got accolades from the main opposition. Nobody missed the fullsome praise Pranab Mukherjee got from the former finance minister Yashwant Sinha in the Lok Sabha, who said on record that the BJP had full faith in the finance minister but not in the rest of the government ?which was in any case lame duck in nature.? Few know that Pranab has been in regular touch with Yashwant Sinha whose role as the chairman of the Parliamentary Standing Committee is critical in the context of key legislative reforms in finance.

The leader of the opposition in the Lok Sabha, Sushma Swaraj, too promptly got up and endorsed Yashwant Sinha?s expression of full faith in Pranab Mukherjee. Sinha also said he wished well for Pranab Mukherjee in all his future assignments, obviously hinting at the near consensus across the political spectrum over his much-speculated candidature as India?s next President.

Indeed, it is only Pranab Mukherjee?s creative pragmatism that helps him win the goodwill of such diverse ideological formations as the Left and the BJP. And such goodwill clearly comes in handy when your name gets thrown up as a potential candidate to become India?s President. The sheer consensus around Pranab Mukherjee as a presidential candidate appears to be somewhat forcing the hand of the Congress leadership!

The finance minister showed pragmatism and decided to relent on the issue of GAAR simply because he saw the writing on the wall. With the current account deficit running at nearly 4% of GDP, India needed at least $85 billion of net capital inflows to fill the BOP gap. With capital flows uncertain, the rupee had also turned volatile and weak against the dollar, of late. Most analysts were returning to the narrative of rupee at 55 to a dollar or even weaker than that. The rupee seems to have stabilised a bit after the postponement of GAAR.

FII inflows are a critical component of the overall capital inflows whose predictability is essential to stem the sheer volatility in exchange rate.

Indeed, from January to March this year, India attracted the second-largest net FII inflows ($8.6 billion) in Asia. However, post the budget announcements, the month of April saw a net outflow of FII money. This reversal has caused some panic in the market. The reversal was caused largely because of all the confusion generated by new provisions to tax FIIs coming into India through Mauritius.

Pranab Mukherjee took some time to realise that he had stirred a hornet?s nest. Obviously, he was ill-advised by some of his taxmen with tunnel visions. He has put off GAAR and rightly agreed to have a more representative panel look at the rules and guidelines that will govern GAAR from 2013-14.

There is a broader realisation that, at this stage of growth, India will be a substantial importer of capital to fund its infrastructure and other needs. All policymakers, particularly taxmen, must keep this fundamental fact in mind. So their wooing foreign money need not be seen in ideological terms. It is a necessity.

The finance minister, however, has chosen not to give in on the Vodafone tax issue. He is standing his ground because he believes that some tax must be paid when assets located in India change hands. For good measure, the finance minister also clarified that there will be no retrospective taxation in case where the final assessment has already been made by the tax authorities. So those cases where final assessment is already done will not be reopened.

Meanwhile, the finance ministry is attempting some compromise solution with Vodafone wherein the latter could pay up a much reduced tax amount which does not have the penalty and interest component. A compromise deal is also part of Mukherjee?s pragmatic approach and a desire to come up with solutions to tricky problems.

Indeed, the Congress party will need more politically-savvy problem-solvers to step into the shoes of Mukherjee who heads over 25 group of ministers looking at issues as diverse as gas and spectrum allocation to media regulation! The need to throw up astute problem-solvers will be felt acutely if Mukherjee moves to Rashtrapati Bhavan as is being widely speculated. The Congress president must be in a big dilemma, to say the least.

mk.venu@expressindia.com