Better to exempt FPIs from indirect transfer provisions: Expert

In a relief for foreign investors, the tax department has put on hold its recent directive on taxation on indirect transfers of shares. In December 2016, the Central Board of Direct Taxes (CBDT) had issued regulations for taxation on indirect transfers of Indian assets for foreign investors. The move will ease fears of foreign investors in regard to additional taxation, said Sridhar Sivaram, Investment Director at Enam Holdings. A sell-off was likely if the clarification had not come through. Tax clarity is a big issue and India has not fared well on this front, he said adding such tax irritants reduce India’s overweight position. Sivaram said complete exemption of foreign portfolio investors (FPIs) from indirect transfer provisions is the better option. India is seeing some inflows on back of combination of factors. Emerging markets have seen a good start to 2017 with better than expected earnings and appreciation in currencies. Sivaram said the domestic market at this time is stock-specific with more opportunities in the largecaps. Below is the verbatim transcript of Sridhar Sivaram’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: I remember that two to three weeks back, late December after the circular had come out you had told us that this can have some pernicious impact on appetite. People were not selling out because of it, so what will the response be now that it has just been held in abeyance?A: I have had discussions with many of my friends who are managers of large foreign institutional investors (FII) houses managing India funds. I think this wasn’t irritant; this could have been a big issue as far as the markets are concerned. The feeling was that this was – it seemed so bizzare that people didn’t believe that this could actually go through and the expectation was some clarification will come. I didn’t expect it now the expectation was it will come in the Budget and this will not go through. Had it not come up to the Budget then we could have seen a huge sell-off because this has a potential of fairly substantial amount of India dedicated funds getting impacted and I am happy to see that the government as acted quite fast because this came almost at the end of December and most FIIs were on holidays and the government has acted as soon as some of the media partners like you guys and some of the others industry partners who had come out and made representations to the government I am happy that they have acted fast and they have understood the seriousness of this whole issue.Anuj: Coincidence that we also had FII buy numbers yesterday. Do you get the sense that the tide could turn now from here on?A: You will also have to keep in perspective that the emerging markets have had a very good start, so if you see year-to-date emerging markets are already up 4-5 percent. Brazil again had an amazing start it is up almost 8 percent. Currencies have actually appreciated in most emerging markets. We are seeing some flows to emerging markets funds, so it has been a great start to emerging markets. Just keep in mind that India’s result season as of now has been much better than expected. I mean most of us were not very sure how to analyse this demonetisation and the impact of that on the earnings. Have to say that have been pleasantly surprised for the results that we have seen till now. It could be a combination of factors but, we will have to wait and see how this whole thing pans out; so far so good. Sonia: For now this CBDT circular has been put on hold, so it is a respite for the time being. However, there is an expectation that there could be some amendments in the Budget on the February 1st with respect to this. What could those amendments be are, we looking at any kind of carve outs for foreign portfolio investors (FPIs ) like it was done with the minimum alternate tax (MAT) or are we even looking at diluting the applicability of some of the provisions for FPIs?A: I sincerely hope that an amendment is made in the section itself, so that FPIs or FIIs are exempt from this. I understand there is a similar provision in China also and there FIIs and FPIs have been specifically exempted from such provisions because they are really portfolio investors and not looking to control or make an controlling stake in company. My other point is that we do see every year some issue on taxation. You mentioned about MAT which was an irritant, it stayed for a while and then the government came up with some clarifications we are seeing with this now.I sincerely hope that the tax clarity which is more important because speaking to some of my friends and also having being part of FII house for many years I don’t think paying tax is such a big issue. I think the clarity of taxation is a bigger issue and for whatever reason India hasn’t fared very well as far as clarity of taxation is concerned. I sincerely hope that an attempt is made so that these things do not repeat it is an irritant specially keep in mind that India as a country hasn’t done well last year. Even pre-demonetisation India was underperforming and ended up almost 10 percent underperformance over emerging markets and most fund managers were over weighted India. After a point you just capitulated and we know that many fund managers some of whom I have interviewed on your channel have said that they have reduced the overweight of India. So, these irritants just add up to some of those reasons to reduce India overweight. I sincerely hope given that our government has acted very fast on this I hope that they ensure that we don’t get any future such shock. We have been getting this almost every year once in a while.