Has the government bitten off more than it can chew with GAAR?
The introduction of General Anti-Avoidance Rules (GAAR) in budget 2012-13 has set off the proverbial storm in a teacup. Foreign investors, who will be primarily affected by this rule, are up in arms, and are lobbying furiously with the Finance Ministry for its withdrawal. So far the latter has refused to budge on the essentials, though it has promised to soften the rules so that honest investors are not unduly harassed by the tax man.
What is GAAR and why has it perturbed FIIs so much? India has a Double Taxation Avoidance Agreement (DTAA) with countries such as Mauritius and Singapore. A large number (by some estimates, as much as 50 per cent) of FIIs have until now routed their investments via Mauritius in order to avoid paying taxes on their investments in India. This status is now threatened by GAAR. » Read more..
Goldman Sachs’ recent announcement that it is upgrading the Indian equity market from underweight to market weight has created a palpable sense of excitement. In a market where good news is hard to come by, many market participants have seized upon this piece of news just as a drowning man clutches at straws. Our view is one of guarded optimism. At the end of the first quarter of 2012, the domestic and international problems that led to the Indian markets nose-diving by almost 25 per cent in 2011 are not quite over.
But first let us examine Goldman Sachs’ reasons for the upgrade. Its analysts argue that the European problems that had weighed heavily on the Indian markets have abated. The month of March has gone by without inflicting much damage: while the Congress Party’s performance in the state elections was disappointing, at least the budget was neutral vis-à-vis the markets. Moreover, Goldman’s analysts derive optimism from the fact that core inflation is softening. They also expect domestic growth to revive in the second half of the calendar year. They have also suggested that as the year progresses earnings estimates for 2013 could get revised upward. And finally, they argue that current valuations are attractive compared to the 10-year average of the MSCI India index. » Read more..