ternal 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