The euphoria over GAAR lasted for exactly 90 minutes in the markets

The finance minister's clarifications on GAAR got traders excited briefly, but the euphoria is over the next day

The euphoria over GAAR (General Anti-Avoidance Rule) lasted for exactly 90 minutes in the markets. Immediately after the finance minister announced the deferment of implementation of GAAR by a year, the Sensex shot up by nearly 300 points (intra-day) from a low of 16,652 to 16,944, to close near the day’s high on Monday. However, markets have gone back to discount other issues such as poor guidance by Cognizant, European polls and weak US data.
This raises the question that was GAAR really as draconian as it was made out to be or was it just its deferment, and not rejection, playing on the minds of investors?
While by deferring GAAR, the government has just kicked the issue forward. What is being keenly watched will be the outcome of the committee, which will be giving its recommendation for formulating the rules and guidelines for implementation of the GAAR provisions and to suggest safeguards so that these provisions are not applied indiscriminately. The committee is expected to issue clarifications by May 31, 2012.
One of the big issues that gave GAAR the bad name was the indiscriminate use of the provision in the hands of income-tax officers who were the deciding authority on which companies need to be taxed. The committee’s report will throw light on how the government is going to bring in checks and balances in the system and is not a subjective issue.
The finance minister has already signaled that he is being practical when he said that the onus of proof of avoidance will lie with the tax authorities and that the proposed retrospective amendment of the income tax laws will not override double taxation avoidance agreement (DTAA) with 82 countries.
The time between the committee report and implementation will be only nine months in which investing companies will have to structure themselves to take benefit of the provisions. Though the implementation has been deferred by a year, the GAAR issue will crop up next month again and may come back to hound companies and markets in nine months.
Kotak Securities in its strategy report on the event says that at a time when GAAR can be mistaken for Government Avoids ALL Risks, the Indian government needs to vigorously tackle the growing sense of gloom and despondency in the country.

Source : BS