The impact of General Anti-Avoidance Rules or GAAR in Indian Equity Market

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            There has been a lot of Uncertainty over General Anti-Avoidance Rules or GAAR from last few month after it was proposed by Finance Minister in Union Budget on 16th March 2012.With this post I am trying to address how GAAR will impact the FII(Foreign Institutional Investors) inflows in Indian Equity market.

What is GAAR:

          Indian Government is trying to do some amendments to the Income Tax Act by introducing the General Anti-Avoidance Rules or GAAR. Most of the foreign investors investing in India by means of avoidance of tax rather than to do genuine business.So GAAR gives tax authorities a power to disregard such transactions and include the earning in the assesses income.

The Impact on Indian Equity Market :

             Under the Double Taxation Avoidance Agreement between India and Mauritius FIIs coming from Mauritius are required to pay tax only in Mauritius,But there is no capital gains tax in Switzerland they don’t pay tax anywhere. Investors worry that they had not taken this tax liability into consideration while invested through Mauritius because it is uncertain that the rule will be applied to those who have invested before 1st April 2012 also.

              There are lots of volatility noticed in Indian market after the announcement of GAAR by Finance Minister on Union budge 2012.FIIs making a cautious approach for new investment in Indian Equity Market.  Initial three months of the year 2012 was very positive for Indian market as there were lots of buying interest seen by FII,but after post union budget 2012 ,there was continuously selling pressure seen in the Indian market by FIIs.

Here is the statistics of FII Activity for the Year 2012 so far:

Month Gross Purchase(Cr) Gross Sale(Cr) Net Investment(Cr) Cumulative investment ($Mn)
January 2012 50,467.40    40,109.90    10,357.70    2,037.22
February 2012 79,898.60     54,686.60   25,212.10    5,127.67
March 2012 63,795.10    55,413.80    8,381.10    1,684.82
April 2012 41,091.90    42,200.50    -1,109.10    -205.53
May 2012 6,716.50    5,840.40    876.10    166.21

            FIIs holds the majority stake in Indian companies in stock market which directs the market moment. From last couple of month these companies are suffering from the selling pressure by the news of introducing GAAR .The market will remain volatile till the finance minister clarify about the GAAR provision which is suppose to present as finance bill on 7th may 2012.

          So this is my first post towards the Indian equity market and will keep you updating with the latest and some more important aspect of share market topics soon.Let me know with your valuable feedback how this post is helpful.

Statistics Source : http://www.indiainfoline.com

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One thought on “The impact of General Anti-Avoidance Rules or GAAR in Indian Equity Market

  1. I think the way GAAR got introduced yesterday, it is anti-Indian and pro-foriegn companies. No regulation on Participatory Notes P-N ! Foriegn companies will also not be regulated. What nonsense is this?

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