Stocks rallied smartly on Wednesday after the government clarified that categories I & II foreign portfolio investors (FPIs) would continue to be exempted from indirect transfer provisions.
Investors were also relieved the government had not upped the securities transaction tax or changed the rules for capital gains tax. This had been widely anticipated after the Prime Minister’s comments the rich were not contributing enough.
Shrugging off the disappointment over corporate taxes not being lowered, the Sensex soared by 1.8% to an over three-month high of over 28,000 with gains being led by auto and realty stocks. Nirmal Jain,chairman of IIFL, said the clarification on indirect transfers was a good signal to FPIs since otherwise, India-specific funds would have had problems. Market veteran Ramesh Damani said the move reflects the maturity of the Indian budgetary process. “We finally realised that we cannot kill the goose that lays golden eggs,” Damani said.
There were, however, a couple of devils in the fine print, which, unless clarified, may increase the tax incidence for investors. One proposal has partially rolled back the long term capital gains (LTCG) exemption for listed shares acquired via off market transfers.
“The government must come out with a full list of transactions that will fall outside the purview of the proposed amendment so as to ensure that it doesn’t create nuisance value for genuine restructuring transactions meant for facilitating business improvement and growth.” Ravi Mehta, Partner, Grant Thornton India, said. Tax experts suggested this could pose problems for promoters who had sold their shares to private equity players and then got the company listed since no securities transaction tax would have been paid when the transfer of shares took place. Dinesh Kanabar, tax expert pointed a long term capital gains tax of 10% would be levied on such sales.
You may also to watch this video
The stock markets were also appreciative of the finance minister’s attempts to rein in market borrowings as that would help lower interest artes and facilitate borrowings by private sector companies.
The large outlays for rural and agri sectors as also the big projected spends for the infra sector were seen as helping boost demand for materials such as steel and cement.