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Jul 11 2014, 13:16 IST
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Arun Jaitley's move aims to end the uncertainty over tax treatment and will encourage funds managers to shift to India. Arun Jaitley's move aims to end the uncertainty over tax treatment and will encourage funds managers to shift to India.
SummaryFPIs buy shares as FM says income from transaction in securities to be treated as capital gains...

Clarity on tax treatment for foreign funds and additional measures announced by finance minister Arun Jaitley to strengthen the capital markets were well received by foreign portfolio investors (FPIs) on Thursday.

Overseas funds were net buyers of Indian shares for the seventh consecutive session as the finance minister said the income of overseas portfolio investors from transaction in securities will be treated as capital gains and not business income.

The finance minister’s move aims to end the uncertainty over tax treatment and will encourage funds managers to shift to India.

FPIs bought shares worth nearly $27 million in the cash segment on Thursday, showed provisional data from stock exchanges.

“Clarity on tax regime, uniform know your client (KYC) and a single demat account, all these measures are extremely positive. Capital markets are the culmination of all markets and, hence, it reflects the sentiments of comprehensive changes. By providing clarity on tax regime, the government has done the right thing,” said Sunil Sanghai, MD & head of global banking, HSBC (India).

Even the markets made a U-turn with the Sensex climbing 800 points from the day’s low, before the weak global cues again pulled the markets down by 72 points or 0.3%. With Thursday’s purchases, foreign inflows into equities have crossed $11-billion mark, showed data.

“The clarification that foreign institutional investors (FIIs) will be taxed as per the capital gains tax rules and not under the business income tax rates is a big positive for the foreign institutional investors. The fund managers were operating outside India to avoid the business income rule, now they can relocate to India. If fund managers relocate to India, it will create more tax revenues and job opportunities,” said UR Bhat, director at Dalton Capital Advisors.

Besides the clarity on tax regime, Jaitley also announced introduction of uniform KYC (know your client) norms and a one-demat account for all asset classes. The move will boost sentiment and help the markets grow in the long term, said experts.

“Though India is seen as an attractive investment destination, documentation creates a hurdle for investment. The proposal to introduce uniform KYC norms and inter usability of KYC records across the entire financial sector will definitely encourage foreign investment.

Fund managers would now be able to relocate to India without creating additional tax risk for the funds they manage,” said Suresh Swamy, executive director of financial services, PricewaterhouseCoopers

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