P-notes to take a hit as new tax treaty ready to roll-out; Will tourist money leave?

Sebi data shows that around 90 percent of P-note investments come through Singapore and Mauritius, the countries with which India has made tax amendments, reports the Business Standard.

As per the amended double taxation anti-avoidance agreements (DTAAs), all investments made from these sovereign states would attract short-term capital gains as the exemptions would get removed.

Under the new treaty hedge funds and other short-term investors will pay a 15 percent short-term capital gains tax on transfer of shares (7.5 percent in the two year transition period); listed F&O will attract a much higher tax rate of 30 percent Private equity funds will pay long-term capital gains tax of 10 percent.

"For P-Note investors, this will mean an increase in cost of taking exposure to Indian shares. For P-Note issuers, this will translate into operational challenges of computing taxes and recovery from clients," said Tejas Desai, Tax Partner for Financial Services, EY India.

On the matter Shaktikanta Das, Economic Affairs Secretary had said that the changes with respect to the P-notes won't upset the market. (Read more)

In an earlier interview with CNBC-TV18 he had said, "SEBI has already held consultations with various market players and whatever will be done, will be done in consultation with the market players. The regime has to be transparent enough and should be effective enough to get all the information."

Indian equity market at present has been on a tear as major benchmark indices have made new tops and foreign money has been finding its way back to the market. The amendments made to this tax treaty was necessary to curb the menace of black money but how will foreign investors react to this is something only time will tell.