India Delays Tax-Dodge Rule That Riled Foreign Investors

India has delayed for a year the implementation of controversial rules, first announced in mid-March, to combat tax-avoidance, Finance Minister Pranab Mukherjee told lawmakers in New Delhi on Monday.

The General Anti-Avoidance Rule, or GAAR, is aimed at companies perceived to be using offshore transactions, among other techniques, to avoid paying taxes. The new policy raised uncertainty among those who invest in India through units based in tax-favorable countries, like Mauritius.

The stated reason for the postponement of GAAR enforcement to April 2013 was to provide more time to both tax payers and tax administration to address all issues, but the move is also viewed as part of an effort by the Manmohan Singh administration to bolster a slowing economy, according to The Hindu newspaper.

The GAAR had officials at Vodafone Group PLC (London: VOD) concerned the company would have to pay $2 billion in back taxes for the $11.2 billion buyout of Hutchison Essar Ltd. in 2007 from Hutchison Whampoa Ltd. (Hong Kong: 13) to form Vodafone India. India's Supreme Court had already ruled in Vodafone's favor, but the tax policy shift puts into question whether or not the government would honor the court's decision.

The announcement Friday by New Delhi that it will review its tax policy with Mauritius, from where billions of capital flow into India, has originated in recent years, also gave foreign investors the jitters. In response to those concerns, the government said its contemplated its tax law revisions will not affect double-taxation treaties India has with 82 countries.

The rupee has been battered over debt concerns and a slowdown of inflows of dollars. In order to boost the currency, the Reserve Bank of India intervened last week by raising the ceiling on a type foreign-currency deposits and loosened restorations on foreign-currency credits. The delay in the implementation of the Gaar will also likely help the rupee.

With GAAR implementation deferred by a year, inflows are likely to resume in the coming days, pushing USD/INR lower, Standard Chartered Bank said in a note, according to The Economic Times of India.

After Mukherjee's comments on Monday, the Bombay Stock Exchange's benchmark Sensex index ended the day up 0.48 percent.

The Sensex was up 19.24 percent between the start of the year and its year-to-date peak on Feb. 21, but by the close of trading Monday its year-to-date gains were 9.4 percent. The erosion of growth for the year-to-date is in large part following global trends, but the slowdown has been exacerbated by uncertainties raised by the GAAR announcement in March.