India’s union Finance Minister Pranab Mukherjee has said that the proposed General Anti-Avoidance Rule (GAAR), which will come into effect on April 1, is not aimed at troubling honest taxpayers in the country and allow the authorities to check tax evaders.

Mr. Mukherjee pointed out that he has proposed GAAR to check the increasing number of aggressive tax avoidance schemes. He explicitly said that GAAR will not hurt honest taxpayers in the country and the government will not punish genuine foreign investors who invest in domestic shares through participatory notes.

Mukherjee has proposed the GAAR as part of the union budget presented on March 16 for the year starting on April 1, 2012. The GAAR is aimed at checking the aggressive tax avoidance schemes that exploit the liberal tax laws in investments between countries like India and Mauritius.

According to market analysts, the central government will soon start taxing the inflow of anonymous foreign funds in to the stock market. They expect the investments through participatory notes into the Indian stocks to slowdown if the government introduces the GAAR.

Foreign portfolio investors that are registered with the Indian market regulator issue p-notes. They can also be issued by their sub-accounts for foreign investors, who often invest in the scheme anonymously.

These p-notes often avoid paying taxes in India but the introduction of GAAR would impact the investments in the instruments due to introduction of taxes. Experts say that the proposal could result in shutting down the P-note to invest in India.

The Mumabi stock market, which fell on the news of new taxes on Monday, received on Tuesday on reports that finance ministry officials are seeking clarification on the proposal. The BSE Sensex gained 205 points to close at 17,257.36 on Tuesday.