India Inc might have been displeased by the increased tax incidence in the Union Budget but the stock market was cheerful, thanks to the postponement of the General Anti Avoidance Rules (GAAR) by two years. A sharp decline in stock prices in the Budget session was probably averted by this statement.

It is obvious that the FM was playing to the gallery of stock market participants through this proposal. With foreign portfolio investors now holding more than 50 per cent of the freely traded shares in the Indian stock market, there is no doubt that they are now a force to reckon with. It is also no secret that many foreign investors route their funds through offshore tax havens, with a large portion of these funds coming from shell companies set up in these jurisdictions.

The move to postpone GAAR is, therefore, at odds with the government’s stated mission to fight black money.

The FM had said we need to “accelerate this momentum” (of foreign inflows), while justifying the move. This does not gel with the view on foreign inflows expressed in the monetary policy and economic survey. Both documents had stated that the country is receiving excessive inflows due to the easy monetary policy being adopted by central banks of other countries. Managing the rupee was perceived as a challenge, given these flows. With the European Central Bank beginning its €1.1 trillion bond re-purchase programme, the momentum of inflows will “accelerate” given India’s relatively attractive bond yields, economic growth and currency stability. This would, therefore, have been the right juncture to implement GAAR. Temporary reduction in flows as a result of this move would have made the RBI’s task of managing the currency easier. Genuine foreign investors will find an alternative route to investing in India. Such investors prefer consistency in taxation policies and abhor flip-flops.

Deputy Editor and Head of Research

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