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