Pranam,
NEW DELHI: There was a sense of déjà vu on Dalal Street on Monday. Any talk of revisiting the India-Mauritius double taxation avoidance treaty always spells trouble for the Indian stock market as foreign institutional investors resort to selling fearing that their free lunch is over.
After all, under the present dispensation, they get away without paying capital gains tax in India as well as Mauritius.
It's been the same for the past 10 years with little progress. Given that FIIs account for a large chunk of the Indian stock market wealth, their pressure always forces the government to make a quick retreat despite estimates suggesting that the treaty causes annual revenue loss of $100 million to $500 million.
So what does the treaty offer?
In the early eighties, Indian authorities signed the tax treaty with the island nation which stipulates that capital gains on Indian securities which a company based in Mauritius holds would be exempted from tax in India. Since Mauritius has no tax or negligible tax on such income, it virtually means that FIIs registered in Mauritius pay no tax. Mauritius says such treaties have helped it to develop a vibrant financial services industry and also helped India attract foreign investment.
Now, the government wants capital gains tax at source, which will be in India. This led to panic on Dalal Street, and the sensex fell 600 points in intra-day trade before recovering. Though negotiations have been underway for a while, there has been no discussion since 2008 when talks broke down on the issue.
Even the Indian government has been reluctant to push ahead though a free trade agreement was linked to the revision in the agreement. In any case, the fear of FIIs spoiling the sentiment in the capital markets would be weighing down on a government that is low on confidence and has not undertaken any significant reform moves in the last few months.
The first instance of FII pressure showed in the summer of 2001 when, during the National Democratic Alliance (NDA) rule, the income tax department had issued notices to some FIIs sending jitters through the share market and pulling it down by more than 350 points. In those days a 350 point decline meant that the Sensex lost over 10%.
Finance Minister Yashwant Sinha had to step in and the government was forced to issue a clarification to restore sanity in the financial markets. The tax department also issued statements to boost sentiment and allay any fears.
A few years later, a draft circular issued by the Central Board of Direct Taxes drove FIIs to sell. As a result, on May 22, 2006 the benchmark BSE Sensex fell 1,100 points – nearly 10% of the index -- resulting in suspension of trading following. Again, the then finance minister, P Chidambaram, had to step in to calm nerves.
A little over a year later, FIIs did it again though this time it was not over a tax matter. On October 16, 2007, the Sensex saw one of its steepest fall of 1,744, around 9% of its then value, after the Securities & Exchange Board of India decided to put in place curbs on participatory notes, which are derivative instruments used by investors not allowed to trade directly in Indian markets.
It was only a few days that the sentiment improved and that followed assurances from the government and Sebi.
Again in 2010 the talk of revising the treaty surface and again the markets panicked as FIIs pulled out.
Some tax officials say there is a reluctance on both sides to revise the tax treaty. More than 40% of foreign direct investment to India comes through the Mauritius route and the island nation. Similarly any talk of banning participatory notes (a derivative instrument) which some critics say is used for legitimising black money also revokes a similar response from the Indian stock market.
But the intense pressure on the issue of black money has forced the government to review its tax treaties with several countries. Critics say that Indian authorities should insist on reviewing the treaty with Mauritius and plug the loopholes. Tax authorities said the department has informed the foreign ministry that they would like to hold talks with their counterparts in Mauritius on the issue but it was up to them to respond.
"Nothing is final. It could take 3 year to 30 years for any discussion on the issue," one tax official, who did not wish to be identified, said.
!****!****!
Have a Gr8 Day,
Warm Regards,
۞ ALLIES FINANCIAL SERVICES
Borivali(w), Mumbai, INDIA
3G Mob: +919869958999
e~Mail: AlliesFin@gmail.com
Yahoo: AlliesFin@ymail.com
! Conside Environment Before Printing Anything !
--
Newsletters ~ Reports on
http://Groups.Google.com/group/ALLIESFIN
Mobile WAPSITE :
http://www.AlliesFin.BlogSpot.com
