Mumbai, Feb. 28: If it was the General Anti-Avoidance Rules (GAAR) that scared investors a year ago, a troubling line in the Finance Bill today spooked investors and sent stocks to their worst post-budget performance in four years.
The stock markets today gave a thumbs-down to the budget as finance minister P. Chidambaram’s proposal to slap more tax on companies and the absence of dramatic measures to boost inflows disappointed investors.
As a result, the BSE sensex crashed by around 291 points to end below the psychological mark of 19000 at 18861.54. On the other hand, at the National Stock Exchange (NSE), the CNX nifty plunged by 103.85 points or 1.79 per cent to end below 5700 at 5693.05, a level not seen since November 26, last year.
The real clincher came after the finance minister finished reading the budget speech.
Capital market players said that the saying that devil lies in the details came true as the Finance Bill indicated that a tax residency certificate was a necessary, but not sufficient, condition to claim benefits under double taxation avoidance agreements.
This led to apprehension that the tax authorities will now have more powers to go after foreign investors. “It brought the scare of GAAR back among institutional investors,” said Rikesh Parikh, vice-president (equities), Motilal Oswal Securities.
The move has prompted fears that the identity of the real investors behind the money shovelled by foreign institutional investors into Indian stock markets may now have to be revealed. Not everyone may have a problem with the transparency measure aimed at curbing cash routed through questionable routes.
The Finance Bill said the tax residency certificate would not be enough to claim benefits under double taxation avoidance agreements that are aimed at preventing paying tax in two countries.
“It is proposed to amend Sections 90 and 90A in order to provide that submission of a tax residency certificate is a necessary but not a sufficient condition for claiming benefits under the agreements referred to in sections 90 and 90A,” the bill said.
“All that the Section (90 A (4)) intends to say is, if you produce a TRC that is a complete answer to your status as a resident. But whether you are the beneficial owner is a separate issue. The TRC certifies that you are a resident. It does not certify you are a beneficial owner,” Chidambaram told a media conference later.
“As far as residency is concerned, we will accept the certificate of residency that he produces from that country. As far as beneficial ownership is concerned, that is a question of fact. We are not doing anything unfriendly to the foreign investor. You have to satisfy two conditions,” he said.
Around 42 per cent of FDI and about 40 per cent of FII fund flows into India are routed through Mauritius. It is believed that a large majority of them are third-country investors who want to save on capital gains tax.
While expectations in the corporate world were muted ahead of the budget because of the current economic environment, both globally and in India, those in the stock markets anticipated more.
Capital market experts said the hopes were fuelled partly Chidambaram himself as his tour to various foreign countries and statements there triggered expectations that he could announce some measures that could bring in more inflows. The measures taken by the government since September last year had also generated hope that this budget could follow them up with more bold steps.
Even as these expectations were not met, there was negative surprise in the form of higher surcharge on domestic companies. Capital market circles listed other factors that pulled down equity values.