GAAR has been postponed as current account deficit looms large

The implementation of the much discussed General Anti-Avoidance Rules has been postponed by the government to 2016 from the current targeted date of 1st April 2014. Postponement of the GARR take-off will continue to benefit both foreign and domestic investors to route their money to India through tax havens like Mauritius. Implication of the government decision is that investors will not come under the GAAR proposed tax net two more years.

Finance Minister P Chidambaram’s effort is to attract foreign capital to fill the widening current account deficit. Current year trade data shows that the country is going to face one of the toughest situations in recent years.Imports are increasing much higher pace whereas exports are coming down. Exports has registered decline for eight consecutive months ending on November 2012. Now, the possibility of a severe current account imbalance is very evident as the financial year is closing. The available option thus is to fill the current account gap using foreign capital.

The logic behind the postponement of GAAR is to remove the uncertainties related to foreign capital inflows. GAAR along with the proposed retrospective amendment to the Income tax Act has developed attrition among foreign investors.

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