While the Union Budget specifically did not make any economic growth projections, Finance Minister P Chidambaram did refer to the Reserve Bank of India’s 5.5% estimate as an indicator for economic outlook in the coming year. According to Ashok Wadhwa, group CEO of Ambit Holdings, this poor economic environment might discourage foreign investors from putting money into Indian stocks.
“As a foreign institutional investor, if I was looking at a sub 5 percent climate, my approach would have been more just stay back because there are better destinations from a risk-reward ratio than going to India,” he explained in an interview to CNBC-TV18. Furthermore, he believes the changes to the tax residency certificate (TRC) for FIIs could pose a challenge because it is not sufficient to claim the benefits of the tax treaty. Wadhwa believes the Union Budget 2013-2014 was neutral in nature, but that the FM may have missed out on certain opportunities to curb the current account deficit. “I ask myself whether he has lost an opportunity to be able to address both the current account deficit and address the gold issue by bringing in an amnesty scheme for service tax,” he said. Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: What was your key takeaway from what the Finance Minister had to say and what would you expect the equity market to takeaway from it over the slightly medium term? A: Lot has been said about the Budget, but if you were to just step back and see, six months ago if we were told that the Budget is going to be least destructive and if anything marginally positive, we would have been delighted to accept it. Many have already suggested that we look at it as a statement of financial intent, and since it has done least amount of damage, we just get on with it. I personally believe that the equity market will look at it as marginally positive. We are at the cusp of a political year, with an important political event right around the corner and so with that background what more could the FM have done. He has not tampered with the taxes, he has kept them as consistent and he has covered a lot of loop holes which is very positive. He has also touched upon all the important sectors. Earlier we were talking about how he could do something to bring gold back to the table because there is so much unaccounted gold, and also to get money from abroad to cover the current account deficit through an amnesty scheme. The general consensus was that post the last amnesty scheme in 2007 and the commitments made to Supreme Court, it is unlikely that the government will embark upon that program. The fact is that he has actually introduced an amnesty scheme on service tax. But I ask myself whether he has lost an opportunity to be able to address both the current account deficit and address the gold issue by bringing a lot more of unaccounted gold into the system. We know that these two issues together would have significantly addressed our current account deficit issue and may have even helped us on the fiscal deficit. So overall I would say it a neutral to positive Budget which is not necessarily bad for equities, but is it an opportunity lost by not introducing one more amnesty scheme. Q: If you were in the shoes of an FII and you saw a sub 5 percent performance come in on gross domestic product (GDP), would you say there is a reason to invest in India currently? A: I would agree with you that if I was looking at a sub 5 percent climate my approach would have been more just stay back because there are better destinations from a risk-reward ratio than going to India. Q: The tax residency certificate (TRC) is now a necessary but not a sufficient condition. Apparently it is being seen as adverse for investors who have come in through the Mauritius route because the Central Board of Direct Taxes (CBDT) circular number 789 on Double Taxation Avoidance Agreements (DTAA) appears diluted. The TRC certificates Section 90 and 90A have been amended to say TRC is necessary but not sufficient to claim benefit and penalty for failure to file returns proposed in the Finance Bill. What are your thoughts on that? A: Clearly it is a dilution of the CBDT circular. Clearly it is a challenge to those investors investing through treaty countries like Mauritius. What it goes to say is that if you don’t have a TRC then you are ineligible. But even if you have a TRC, it is not necessarily effectively. It empowers the revenue authorities to take a divergent view despite the company having a TRC, which effectively means that you are no longer sure of the Mauritius tax benefit based purely on if you have the TRC certificate. You therefore have to provide significantly greater amount of satisfaction to the revenue authorities before the tax concession gets granted to you. I haven’t read the fine print, but if the language desirable but not necessary is what is being used then effectively the revenue authorities are empowered to challenge TRC certificates and demand far greater compliance and substance in tax treaty countries.Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!