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After a marathon meeting with finance ministry officials last Wednesday, a clutch of big foreign institutional investors were at the North Block (the finance ministry) in New Delhi again on Monday in a last ditch effort to save their business. They argued against the applicability of the general anti-avoidance rules or GAAR to foreign portfolio investment.
They said that no country taxed foreign investors for buying or selling shares in the stock market.
Here are latest developments:
• It is learnt that FIIs have asked the government on Monday to remove the applicability of General Anti-Avoidance Rules or GAAR to foreign portfolio investment. This is the investment made by FIIs in Indian equities. They argued that no country taxed foreign investment in any stock market around the world. However, the government has made it clear in the previous meeting that there would be no exemption from GAAR.
• A section of FIIs suggested to the government that they should reinstate the securities transaction tax (STT) and exempt FIIs from paying capital gains tax, a source said. Over the past 5 years, FIIs have invested considerable amount of money and not made any significant capital gains. The government has collected about Rs 5000 crore per annum in revenue through STT. The argument is that if the government had no STT and only capital gains tax, they would have received no revenue as not many FIIs have made capital gains on their investments. The BSE Sensex rose about 25 per cent since April 2007 and just over 10 per cent since April 2008.
• Participatory notes are a significant business for many leading foreign brokerages like Merrill Lynch, Morgan Stanley and Goldman Sachs. Representatives from some of the leading foreign brokerages and institutional investors are engaging the government in a dialogue almost every other day, it is learnt. The Finance Ministry last Wednesday told them that they would have to pay short term capital gains tax on transactions that were deemed impermissible, a senior ministry official said. That means if investments were routed through tax havens for avoiding tax, these institutional investors would have to pay tax.
• More than half of the FII money enters Indian financial markets through the Mauritius route. Investments into Indian stock markets through participatory notes may vanish completely after the introduction of GAAR, a FII source said. According to data from market regulator SEBI, P-notes issuance reached Rs 1,83,000 crore at the end of February 2012, about 16.4% of total assets under the foreign investor inflow scheme. P-Notes are instruments used by investors or hedge funds that are not registered with the SEBI to invest in Indian securities and they offer the buyer anonymity. The tax would be imposed on the registered financial firm buying the security on behalf of the client, meaning the brokerage would then pass on the taxes to the end investor.
• In India, the trading volume on stock exchanges in the equity and derivatives markets plummeted on Monday. While major markets in Hong Kong and Europe were closed for extended Easter holiday, the sharp fall by 50 per cent in the average trading volume was attributed to the uncertainty over GAAR. The market wide turnover on Monday was Rs 87,764 crore against the 10-day average of Rs 1,65,005 crore. This includes equity and derivatives markets on BSE and NSE.
• Till recently, foreign institutional investors paid no capital gains tax in India if they invested through Mauritius or other tax havens. With the new GAAR provisions, they would be taxed for capital gains. The applicable tax rate is 15 per cent for short-term gains and zero for long-term gains in equity markets. In the derivatives segment, all capital gains tax would be construed as business income and taxed at the marginal tax rate of 40 per cent. There are fears that if the government does not provide any relief, FIIs would cut their exposure to India and pull out money. The market value of listed Indian equities is $ 1.3 trillion and the value of FII investment is estimated at $ 200bn.