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Kerala PSC Indian Economy Book Study Materials Page 427
Book's First Pageternal e tor in ndia 15.13 according to which the onus to prove that due to domestic currency appreciation. This would an arrangement is ‘impermissible’ will happen when the local currency is appreciating lie with the tax department. The GAAR due to surge in capital flows and the debt service panel, the final body that will decide on liability is falling in domestic currency terms. the applicability of the law, will include The opposite would happen when the domestic an independent member. The rule can currency is depreciating due to reversal of capital apply on domestic as well as overseas flows during crisis situations, as happened during transactions. the 2008 global crisis. (iv) GAAR is a very broadbased provision and A sharp depreciation in local currency would can easily be applied to most tax-saving mean corresponding increase in debt service liability, arrangements. Many experts feel that the as more domestic currency would be required to provision would give unbridled powers buy the same amount of foreign exchange for to tax officers, allowing them to question debt service payments. This would lead to erosion any taxsaving deal. Foreign institutional in profit margin and have ‘mark-to-market’ investors are worried that their implications for the corporate. There would also investments routed through Mauritius could be denied tax benefits enjoyed be ‘debt overhang’ problem, as the volume of debt by them under the Indo-Mauritius Tax would rise in local currency terms. Together, these Treaty. The proposal (announced on 8 factors could create corporate distress, especially May, 2012) had spooked stock market as because the rupee tends to depreciate precisely FII inflows dropped on concerns, and the when the Indian economy is also under stress, rupee hit a low of Rs. 53.47 to the Dollar. and corporate revenues and margins are under As per the decision taken last year, the pressure. Government in February 2017 announced to In this context, it is felt that one of the factors enforce the GAAR from the financial year 2017- contributing to faster recovery of the Indian 18. All consultations with the stakeholders have economy after the 2008 global crisis was the low been completed and the regulatory framework level of corporate external debt. As a result, the for it is expected to be announced by late March significant decline in the value of rupee did not 2017. have a major fallout for the corporate balance- sheets. Foreign currency borrowings, therefore, risks in foreign currency have to be contracted carefully, especially when borrowings no ‘natural hedge’ is available. Such natural hedge would happen when a foreign currency borrower Corporate borrowers in India and other emerging also has an export market for its products. As a economies are keen to borrow in foreign currency result, export receivables would offset, at least to to benefit from lower interest and longer terms of some extent, the currency risk inherent in debt credit. Such borrowings however, are not always helpful, especially in times of high currency service payments. This happens because fall in the volatility. During good times, domestic borrowers value of the rupee that leads to higher debt service could enjoy triple benefits of payments is partly compensated by the increase in the value of rupee receivables through exports. (i) lower interest rates, (ii) longer maturity, and When export receivables and the currency of borrowings is different, the prudent approach (iii) capital gains