GAAR hits shares of Mauritius-based funds like India Infoline, Edelweiss, Cox & Kings

MUMBAI: After the finance minister Pranab Mukherjee introduced the General Anti Avoidance Rule ( GAAR) in the Budget on March 16 giving the tax department the power to deny double taxation treaty benefits to foreign institutions routing their money through Mauritius, shares of two-thirds of the companies in which these funds have sizeable stakes have declined more than the benchmark indices.

It is feared that many Mauritius-based investors will not be in a position to gain from this exemption as per GAAR and this may prompt them to dump Indian shares.

"Standalone FIIs, which have no permanent establishment in Mauritius, will be taxed from April 1 and hence may unwind their positions" said Saurav Mukherjea, head of Equities - Ambit Capital.

Shares of Firstsource Solutions, India Infoline, Titagarh Wagons, Cox & Kings, NCC, Edelweiss Financial Services, IDFC and Jain Irrigation have fallen between 10% and 20% after the Budget compared to the 2.5% decline in the benchmark Sensex.

As per GAAR, the onus will be on the foreign institution to prove to the taxman that it has not set up the structure in Mauritius solely for availing of the tax benefit.

If the institution is unable to prove this, trades that are squared off within a year will be charged capital gains tax of 15%.

"FIIs will react to the government move on GAAR and some may unwind their position before March 31 as there is no clarity on taxation in the new financial year," said Dhananjay Sinha, co-head institutional research, Emkay Global.

Shares of Firstsource Solution declined 15% since March 16. Mauritius-based Aranda Investment and Metavante Investment together hold nearly 36.99% stake in the company.

India Infoline has dropped 13% as Mauritius-based foreign funds hold 21.98% stake in the company. Shares of other companies such as Titagarh Wagons, Cox & Kings, NCC, Edelweiss Financial Services, IDFC, in which Mauritius-based investors hold 10% to 18% stake, have dropped over 10% to 20%.