In the month of July, the stock markets saw the highest outflow in the past nine months by FPIs and a sale of more than Rs 12,000 crore worth of equities.
Finance Minister Nirmala Sitharaman's maiden Budget continued the Modi government 2.0's Robin Hood agenda of taxing the rich and helping the poor. However, the announcements acted as a dagger making the Nifty bleed and plunge more than 1,000 points in just one month.
This decline has been due to three primary pain points: levy of super-rich cess on the income of foreign portfolio investors (FPIs), the continuation of long-term capital gains (LTCG) tax on securities, and stringent rules relating to dividend distribution tax (DDT).
Considering the adverse effects that this budget brought along, the government decided to reconsider a few tax-related norms that were announced earlier.
Amongst the pain points from the Budget, the new levy of super-rich cess on FPIs had become the scourge for Indian stock markets.
In the month of July, the stock markets saw the highest outflow in the past nine months by FPIs and a sale of more than Rs 12,000 crore worth of equities. A comparison for the first half of 2019 (H1FY19), paints a completely different picture, with FPIs appearing as net buyers every month, barring January.
FPIs, including pension and retirement funds, educational endowment funds, etc., have been entering the Indian markets through the trusts’ route, which gave them the status of a ‘trust’ in the country.
During a discussion on the Finance Bill in the Parliament on July 18, Sitharaman had suggested that FPIs could consider the option of structuring themselves as companies rather than trusts to avoid paying the increased surcharge.
A few days back, the FPIs conveyed to the Ministry that it would be difficult to convert current trusts into companies. The FPIs had thus sought a rollback of surcharge tax as a confidence-boosting signal from the government.
The Finance Ministry has estimated that collection through the super-rich cess on FPIs will not amount to even one percent of the total estimated mobilisation through this cess. Thus, barring them from it might be considered by the Ministry.
The slowdown-hit economy is expected to get a booster dose from the government with the Finance Ministry working on a stimulus package for the industry, which includes a plethora of financial measures ranging from tax cuts, subsidies and other incentives - the cess removal for FPIs being a key measure amongst these.
Nifty surged 200 points intraday on August 8 – the highest one-day gain in the last three months amid reports that the government would soon make announcements favoring investors.
A mere ray of hope brought an upswing of approximately 2 percent intraday for the index on August 8, showing the dire need for reconsideration of taxation norms for FPIs. While the final announcements are still awaited there is a high probability it will favour FPIs.
The author is Head of Research at CapitalVia Global Research Limited.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.