Tax experts say once the proposals come into effect from the new financial year, FIIs might find it difficult to avoid paying tax in India even while being registered in Mauritius with which India has a double taxation avoidance agreement (DTAA). The new laws will be applicable from April 1.
I think a lot of Mauritius-based FIIs are selling so the gains can be booked before March 31 and, therefore, capital gains cannot be taxed, said HP Ranina, a leading corporate tax lawyer. There is a feeling that post the new regime, tax department may not be satisfied with only a residency certificate and may demand proof of commercial activity in Mauritius. Currently, many FIIs provide the address of their lawyers' firms, he said.
FIIs have already slowed the pace at which they pumped in money into the Indian equity market.
In January and February, their net investments in India were pegged at $2.2 billion and $5.1 billion respectively. In March, their net investments is below $2 billion. On Monday, FIIs were net sellers at $26 million.
While presenting the Union Budget on March 16, finance minister Pranab Mukherjee proposed to introduce a general anti-avoidance rule (GAAR) in order to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling review by a GAAR panel.
Experts say many FIIs might shift their operations to Singapore with which India has a DTAA. Many foreign investors already have trading desks in Singapore.
The impact of the FII selling was clearly evident on the bourses on Monday. Indian equities fell to their lowest in nearly two months with the benchmark Sensex closing below its 200-day moving average, the first time in seven weeks.
The 30-share Sensex fell 308 points or 1.7% to close at 17,052, while the broader 50-share Nifty was down 94 points or 1.7% at 5,184. Incidentally, the Sensex has slid 2.8% since the Budget, which has attracted much criticism.
All of the 30 Sensex stocks declined on Monday. In the broader market, breadth was weak with about 65% or 1,955 stocks traded on the BSE ending lower compared with 919 advances. All sectoral indices too ended in the red.