The stock markets went into a tailspin on Monday as a mix of global and domestic concerns stemming from some budget proposals spooked investors.
The 30-share Sensex fell 910 points intra-day before recouping some of its losses to end the day at 38,720.57 points, which is 2.01% or 792.82 points lower than Friday’s close. The broader Nifty 50 index shed 252.55 points to close at 11,558.60 points for the day.
Sentiment was bearish to begin with as Asian markets were depressed following robust U.S. jobs data that lowered the prospects of a rate cut by the Federal Reserve.
Adding to this was the budget proposal to increase tax surcharge on the high-income group and the imposition of a tax on buyback by listed companies.
The higher surcharge is expected to impact foreign portfolio investors (FPIs) who operate through a trust or an association of persons structure. Since these are not recognised as corporate entities by the Income Tax Act, the tax rates applicable to them will be the same as for individuals.
Consequently, the effective tax rate will go up from 35.8% to 42.7% for entities with an income of over ₹5 crore. For those earning between ₹2 crore and ₹5 crore, the effective tax rate will increase from 35.8% to 39%.
“The proposed tax regime will hurt non-corporate FPIs as well as several domestic funds, particularly open ended Category III AIFs (Alternate Investment Funds),” said Tejesh Chitlangi, Senior Partner,. IC Universal Legal.
