MAT row: Brokerages red flag tax on FPIs as key risk for markets

While the government has stood its ground on the applicability of minimum alternate tax (MAT)…

While the government has stood its ground on the applicability of minimum alternate tax (MAT), saying that foreign institutional investors (FPIs) ought to consider judicial appeal for the retrospective tax demand, increasing number of foreign brokerages are red flagging the issue as a risk for the Indian equity market.

Even as factors like the slow earnings recovery and fate of reforms like the modified Land Bill have impacted market performance since early March, the latest statement from finance ministry officials including finance minister Arun Jaitely on the tax issue seem to be weighing on market’s mind.

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FPI buying in Indian equities has been on the downhill since mid-March and the pace of moderation has risen in the last fortnight. Compared to 21-day rolling average FPI purchases of $145 million on March 20, the average buying has fallen to $33 million as of Monday.

The slowdown however is yet to reflect the FPI selling seen in the first half of 2012 when after the finance minister announced introduction of GAAR ( general anti-avoidance rules) from FY13. Back then the rolling average of FII buying dipped from $200 million as of early March to a net selling of $20- 30 million in the months of May and June. Even a significant portion of trading activity in the Nifty futures moved from the National Spot Exchange (NSE) to Singapore Exchange (SGX) with the open interest in the former dipping from 2.5 crore shares a day to 1.5 crore shares while that in SGX futures jumping from 4 lakh shares a day to 8 lakh shares in the same period.

While it may be too early for the MAT issue to have a similar impact on the market, experts are not ruling out the probability of such a move. Already, global brokerages UBS and CLSA have highlighted that government’s tax menace could be a potential risk for the market sentiment if the ambit of MAT demand is widened considerably.

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