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FII tax woes, weak monsoon forecast may keep bulls in check

The News International Team

Benchmark indices snapped a 5-day losing streak on Wednesday, but most market players are skeptical if the upswing can sustain. Adding to worries over earnings growth and the tax demand on FIIs, is the forecast of below normal monsoon .

The more pressing concern near term could be the Minimum Alternate Tax (MAT) demand for prior years on FIIs. Already, there appears to be a lot of ambiguity over it.

For instance, FIIs from jurisdictions like Mauritius and Singapore, which have a Double Taxation Avoidance Agreement (DTAA) with India, have not been served notices so far.

But many tax experts have questioned the tax department’s claim of Rs 40,000 crore of unpaid MAT, saying the huge number could possibly include FIIs from DTAA treaty jurisdictions as well .

Chairman of Central Board Of Direct Taxation told CNBC-TV18 that FIIs from treaty jurisdictions could avail of the treaty benefit(which exempts them from paying any tax here).

But that begs the question: why the differential treatment?

Does it mean the government wants more FIIs to come through DTAA jurisdictions, when there enough instances of the treaty being abused?

Successive governments have been trying to plug the loopholes in the treaty, but without much success.

With officials from the Finance Ministry saying they will not yiled to the FIIs demand for a waiver, a long drawn legal battle appears to be on the cards.

Interestingly, there have been no explicit threats from FIIs like in 2012 when the then Finance Minister had proposed some stringent measures under GAAR.

Excerpts from a letter that Asia Securities Industry and Financial Markets Association (which counts the top investment banks as its members) had written to the Finance Ministery and Sebi in March 2012:

“FIIs are carefully evaluating these new tax risks. Some institutions have told their clients that they will not take on any new India positions…

….If these tax uncertainties are not resolved quickly we fear that FIIs will decide that the tax risks are unacceptable. These investors may then proceed to liquidate their India investments and such a disorderly dissolution of large positions held by these overseas investors could seriously disrupt the Indian capital markets.”

With the Finance Ministry in a belligerent mood, FIIs may not want to risk a confrontation right away.

Most likely, they will continue to sulk for a while, till a truce is worked out.

And some brokerages are hopeful that the situation will not get out of hand, but the government needs to act fast.

“A quick clarification from the government is vital as most investors are now concerned that this issue could get entangled in a protracted legal process We believe that given past precedents in similar situations, the issue is likely to be settled in a manner which does not impact FII sentiment materially,” Deutsche Bank Securities wrote in a note to clients today.

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