The BSE Sensex lost more than 350 points during early morning trades, before partially recovering losses in the first trading session after the government announced amendments in the tax avoidance treaties.
Market participants view the amendments in a positive manner as the government has clarified that while past trades will not be taxed, there is a window of one year before the taxes will be introduced in a phased manner.
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The 30-share Sensex fell 363 points during the day to touch a low of 25409.24, before closing at 25597.02, down 175.51 points or 0.68 per cent. The market breadth was weak, though, with almost 1,500 stocks losing ground as against 1,075 gainers. In the Sensex pack, 23 stocks ended in the red on Wednesday. On Tuesday, the government had said that foreign institutional investors (FIIs) using the Mauritius route to invest in Indian shares will have to pay tax, but that it would be introduced in a phased manner and have no retrospective effect. The India-Mauritius Double Taxation Avoidance Agreement (DTAA) allowed foreign investors to be taxed only in Mauritius and even short-term gains in India were not taxed here.
Positive reactions
Market participants also said the near-term could in fact see an increase in flows.
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“The increased taxation should not deter investments meaningfully. India should structurally continue to offer opportunities well ahead of cost of capital. Near-term inflow — before March 31, 2017 — could increase; in order to gain from the tax exemption that is valid until then,” said Bank of America Merrill Lynch in a note.Experts are of the view that while tax costs would definitely go up for foreign investors, the certainty and clarity provided by the government will go a long way in projecting India as a strong and stable economy in terms of regulatory framework.
“Yes, it would push tax costs for investors but there is certainty and clarity,” said Mukesh Butani, Managing Partner, BMR Legal. “A a stable environment will augur well for the Indian Rupee, which would make the tax cost look insignificant. The grandfathering date of April 2017 and a 50% concessional rate up to April 2019 augurs well and lends certainty to investors on the applicability of treaty as investors have been nervous on the future of the Mauritius treaty.”
The agreement with Mauritius is nearly two decades old and many FIIs set up offices there to avail of the tax benefits, in most cases, with just a shell office solely to benefit from the treaty.
Indian markets get jittery whenever there is talk of amending the treaty; concerns related to the General Anti-Avoidance Rule saw the Sensex shed almost 400 points in a singke day, May 8, 2012.
The 30-share Sensex fell 363 points during the day to touch a low of 25409.24