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Last Updated : May 12, 2016 07:53 AM IST | Source: CNBC-TV18

End son-in-law treatment for FIIs; India no Africa: Jhunjhunwala

Terming the amendment to the India-Mauritius Double Tax Avoidance Agreement (DTAA) as a "sensible move by a sensible government", ace investor Rakesh Jhunjhunwala said income on investments made by foreign investors should be subject to tax.

Terming the amendment to the India-Mauritius Double Tax Avoidance Agreement (DTAA) as a "sensible move by a sensible government", ace investor Rakesh Jhunjhunwala said income on investments made by foreign investors should be subject to tax.

"The move is well thought out. It will put all litigation to rest. It is coming into effect in March 2017 anyway," he told CNBC-TV18 in an exclusive interview.

Jhunjhunwala's comments came in the wake of the government's decision to amend the Mauritius treaty, which will allow it to levy capital gains tax on FII income.

He also allayed fears that the law would hamper inflows coming in through the participatory notes route, saying that as long as FIIs were able to get decent returns from India, they would not mind paying tax.

"I have not seen a bull market in which people don't participate because there is a 20% rate of tax. If people see signs of income, money will come," he said.

"Today I pay 34 percent tax on my derivatives trades, for FIIs it is tax free. Post 2017, they will pay 7.5%. I am playing after paying 34% and I don't withdraw (from the market), and they (FIIs) will withdraw if they have to pay 7.5% tax. What kind of argument is this.

"It is just that you want to treat the foreigners as your son-in-law for no reason.

"Some of the derivatives volume may migrate to Singapore. But 7.5% rate of tax is a reasonable rate of tax. If some volumes migrate, so be it. We are not some African country that we cannot do without them. If they see their capital has potential in India, they will come," Jhunjhunwala said

Below is the verbatim transcript of Rakesh Jhunjhunwala's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: How should the market approach this change in tax rules?

A: I think it is a very sensible move by sensible government. Let us see what they have done. Foreign investors who are coming to Mauritius were not paying any long-term tax, no short-term tax and on derivatives also there was no tax. There was a lot of litigation of what will apply to Mauritius and what will not apply to Mauritius.

All litigation is set to rest because all shares bought before March 31, 2017 through Mauritius route are tax free. All derivative income is tax free, all capital gains is tax free. You compare what I pay -- I pay 15 percent short-term capital gains and I pay 34.2 percent rate of tax on my derivative income. What has the government done? All past litigations are over. Up10 March 31, 2017 everything is exempted, beyond that they will pay only 17 percent on derivatives and 7.5 percent on short-term capital gains and no long-term capital gains. They have set out a clear picture up to March 31, 2019.

What is going to happen post 2019 nobody knows. We don’t know what government is going to be in power, what the policies are going to be. So I think this is a very sensible act by sensible government and I don’t see any case for a short-term reaction because as it is up to March 31, 2017, nothing applies. The status quo remains and all past litigation is put to rest.

So I think it is an extremely sensible move on part of the government. It is extremely sensible, well thought-off and very well in the sense there is no case for immediate reaction and what they have done is if FIIs don’t want to invest in India, it is their choice but you have to pay 7.5 percent tax. It is very reasonable.

So I don’t see any case for any kind of a fall and 31 March, 2017 -- nothing applies. After that you have to pay 7.5 percent on a derivative income and 7.5 percent on your short-term capital gains. It is very reasonable, very sensible, litigation is ended, there is no case for immediate reaction and 70 percent of the FIIs are paying tax in their own countries.

So I think this kind of blackmail where if you change anything in the tax laws, it will hit the market, I think is not going to prevail, it is not going to stay.

Latha: There is the fact that USD 33 billion or more than 25 percent of FII inflows comes through participatory notes (P-Notes) and that product dies according to experts.

A: I don’t agree, the product does not die because the reason why the P-Notes is not only because of the tax benefit. The problem about the P-Notes is that there are people who cannot get registered with Securities and Exchange Board of India (SEBI) or suppose I am a large investor, investing USD 5 billion and I want to invest USD 50 million in India so I don’t want to go to the whole process of having a SEBI registration. So I don’t agree that P-Notes are only there to hide the beneficiary or to take tax benefits.

Latha: I am not saying that product existed because of people wanting to escape tax. The explanation we got was that it is first-in-first-tax. The product itself does not recognise the man who is buying but the broker. So a sell by second investor could be taxed because somebody else bought it first. The point is that product can survive only in the non-tax regime.

A: The change in the law has been made for sell of shares of a resident Indian company. The company, which issues the P-Notes is not in India, it is not a resident company. This law applies to sell of shares of a company resident in India. When the P-Note is issued, not by a company, which is resident in India but a company, which is resident abroad. So this law does not apply to them at all. So this is all hogwash that the P-Notes will be taxed two times.

Anuj: The other big talking point is that in one year, will we have a long-term capital gains structure as well in place? It looks like this government is on its path to take that kind of reform as well maybe increase the long-term capital gains horizon from one year to three years for tax long-term gains altogether, would that be a negative?

A: No one in the world is there an securities transaction tax (STT) and the long-term capital gains tax. If government is to impose STT, they will abolish, impose the long-term capital gains tax, they will acknowledge STT.

We can go on speculating about anything, no one in the world do you pay a long-term capital gains tax and a STT and government collects Rs 7,000-8,000 crore of revenue just from two exchanges.

I see no case for a long-term capital gains tax along with STT. You abolish STT and you have a long-term capital gains tax. Anyway whatever is going to happen in the future is going to be negative. So I don’t think they are going to impose us long-term capital gains tax.

Sonia: There is this other amendment that the Finance Minister came up with that from April 2017 to March 2019. The benefit of the 50 percent reduction in the tax rate applicable in India will be subject only to the limitation of benefits articles. So you have to be a bonafide business located in Mauritius to avail of that 50 percent rate. Do you foresee some sort of litigation because of this?

A: There is no litigation. They have said clearly that if you spend 15 lakh on Indian rupees on a company in Mauritius, you are going to get the tax exemption. If you place one person there to look after your company, he is going to cost you more than 15 lakh. In fact, they have taken away the source of all litigation and they have quantified that on what basis, you will be able to get the benefit.

What is very good is, people don’t mind paying some tax, what they don’t like is litigation and uncertainty. So the scope for litigation and uncertainty has diminished substantially.

Anuj: This year we haven’t outperformed. The other point that I wanted to ask was that do you see the Indian market outperformance continuing if we have this Mauritius issue as a reality and general anti avoidance rule (GAAR) as a reality purely because of the kind of domestic cues that we have, do you think this is something that the market will take in its stride and move on? You have been bullish on the market, I heard your last interview?

A: Let me tell you thing that GAAR is not something which is unique to India. I have not seen a bull market in which people don’t participate if there is a 20 percent rate of tax. So I see no reason why -- money will come into India.

If we see income, money will come. It is all hogwash that because of a 7.5 percent rate of tax people won't play. I pay 34 percent on derivatives, today for them it is tax free. Post 2017, they will pay 7.5 percent. So I am paying up to 34 percent. I don’t withdraw and they will withdraw because they have to pay 7.5 percent. What kind of an argument?

You want to treat foreign investors as son-in-laws for no reason. Government has done something very reasonable and very right.

Latha: The P-note was not because people wanted to escape tax. What we were told is that P-Note product is designed in such a way that if you impose capital gains then that product cannot survive because of the first in-first tax.

A: Why it will not survive. There can be two views, but this capital gain applies to sale of shares of a company resident in India. When the P-Note issuer gives the money to the P-Note buyer he is not selling the shares of an Indian company, that person is selling the shares of a Singapore or Mauritian or British company. So, you don't have to pay Indian taxes. You have to pay Indian taxes on sale of shares of a company resident in India. The P-Note issuer is not resident in India.

Latha: What about another point that we got that there will not be any knee-jerk reaction in the market but because people are not able to come through P-Note route some of the futures market may actually migrate to SGX to Singapore. Do you see a migration of volumes?

A: Some of the volumes may migrate but 7.5 percent rate of tax is a reasonable rate of tax. If some volume migrates so be it. We are not some African country we can't do without them. If they feel their capital has potential here in India they will come. They are not going to not come just because 7.5 percent tax. That is my opinion.

Sonia: We have seen green shoots visible as far as earnings are concerned. We are seeing it in the auto, the cement sales, how have you read into all of that and do you think that based on this there could be some more momentum in the market on the upside?

A: We have seen green shoots in the economy. The Indian economy is on the verge of a major reversal. It is being done without spoiling the fiscal situation or reducing rates on an unwarranted basis.

I am bullish, we have had a very good gain and we are consolidating and if monsoons are good and markets internationally are good we will see a good up move. There is a very large up move which is remaining, maybe a bull market, the like of which we have not seen as yet.

Anuj: So, when you say you are super bullish do you think the kind of earnings growth we have we could have a bigger bull market than the one we had in 2003-2008. Now that the market has gone through so much correction over the last one year time wise, price wise, valuation wise?

A: I will tell you one thing. First of all how did the bull market in 2003 come. The ratio of corporate profits to GDP was at all time low. Same thing prevails today. The economy came into an upturn, the same thing prevails today.

Interest rates were coming down in 2003, same thing prevails today and also what will be recognised is there has been a lot of steps to improve efficiency in corporate India. The moment you get volumes the increase in margins will be far disproportionate to the increase in volumes. Am I able to communicate what I am saying?

Latha: Yes, but is there a difference in the global scenario? In 2003 we were standing on the threshold of a global exuberance which is missing today. Therefore will it be as good as 2003?

A: But a global slowdown can delay the inevitable, can postpone it, it cannot end it. Japan was in a bull market from 1980 to 1990, America was in a recession. So, global factors will affect India undoubtedly.

But if globally we don't do well - it may affect us for first three or six months but ultimately if Indian economy is to grow at 8 percent and the world is going to slowdown you will have tonnes of money coming in.

Latha: What is your view of what we are calling green shoots, where do you see them in the economy?

A: You are having increase in mine production, electricity, consumer demand is picking up and don't forget we have had two continuous bad monsoons. Vehicle demand is good, LCV demand is good, HCV demand is good, that is how things start. If you run a 42 kilometre marathon we can see that, we have started running the marathon.

Let me make a disclosure first. I am bullish, I am long the market, I am interested as the market goes up. So, everything I say please take with a pinch of salt, please consult a financial advisor.

Anuj: The phrase that resonates in my mind is the discussion that we had in our conference two years back when you said this is a long term bull market and you won't be surprised to see 1,25,000 on the Nifty in the long term. Do you think that kind of a bull market is ahead of us over the next four or five years?

A: Next four or five years, not in the next four or five years.

Anuj: At least the groundwork will be there for four to five years?

A: That groundwork in India is happening every day. India is improving. The quest for India's growth prospects to improve is a journey and not a destination. So, we are improving methodologies, we are killing crony capitalism, we are trying to have fair taxation, we are trying to obstruct the blocks to infrastructure. So, I want to repeat that the journey to get India to double digit growth is a journey, not a destination. So, that is improving everyday.

Latha: So, you said you were telling your dad something?

A: Only thing when he said Nifty 1,25,000 I used to ask from my dad for my wealth, he said it is all your son, I only asked when. So, Nifty will be 1,25,000 one day I am sure, the only question is when.

Latha: I was going to ask you that?

A: I will ask my son -- he has left for school just now -- and tell you.

Sonia: You can tell us a little bit more about what sectors you will be bullish on because no bull market can proceed without contribution from financials. So, I wanted to specifically ask you about financials, has the time come to buy PSU banks?

A: It is a relay race, some will go later, and I don't want to give any tips there. It is hazardous for health.

Sonia: I am not asking for tips, I am just asking for sector views?

A: Invest in a good mutual fund with a good manager and invest in SIPs.

Latha: But purely to understand where is the baton in the relay race, with which sectors?

A: I won't like to comment on sectors, my interview was on a specific purpose, you can ask me anything for that specific purpose.

Sonia: I take your point completely about the whole better regime, increase in transparency etc but there are a lot of queries coming to us about the kind of investments that came in from Singapore because now this treaty will get extended to Singapore as well and in the last two years we have seen a lot of brokers move from Mauritius to Singapore, just in the very near-term to medium-term, do you see any investments get impacted or any receding of investments from Singapore because of this taxation issue?

A: I think like an investor. I look at return on capital. If I have to pay 7.5 percent tax, I will not invest for that reason, it doesn’t apply to my common sense and to my thinking. India is attractive enough a country that that kind of tax will be disregarded. So I don’t see any effect.

Foreign investors are not God, they are not God's chosen people, that they don’t pay taxes and we pay taxes. I pay 34 percent and they don’t pay anything up to 2017 and then they pay 7.5 percent and then they will not buy them so let them not buy them. As a country we have to sometime be fearless and do what is right.

Latha: I want to come back to a niggling issue for the market. Hypothetically if the P-Note product dies, you would still think that this economy has enough strength for the markets to take this in their stride?

A: The P-Note product will not die because P-Notes are issued -- in the second stage, you are not selling shares of companies resident in India.

The P-Note is held by a company in Mauritius, that company sell the Indian company's shares. It gets the money then the person who is holding the P-Note, sell shares of a Mauritian country and gets the money. So how is that taxable.

Sonia: What is the sense you are getting? By the end of the year, where do you see the Nifty?

A: I know the direction, I don’t know the depth. I wish I knew.

I am not smart enough to know will it going to be 8,000-9,000 or 10,000. Every day we watch the market. Today I have an opinion, tomorrow it could change. So we watch the market under circumstances and if things change, my opinion may change.

Anuj: I just wanted one thought from you and it is not related to any of your investments, I am just bringing it in context, you were a large investor in Interglobe initial public offering (IPO), you have seen a lot of IPOs in the market right now. Do you think we are reaching a stage where the primary market is now reaching a bit of an exuberance proportion and is there a bit of problem emerging from that side?

A: I can say there is over-exuberance there, problem or not I don’t know.

Latha: What is your estimate of earnings growth in FY17?

A: I don’t do this detailing, my research is very fundamental and inefficient.

If God is on our side and we have good monsoon, the profit growth will be far better than what it was in 2015 and 2016 and it will be with surprises on the upside.

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First Published on May 11, 2016 09:54 am
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