Dear FM, if Budget has LTCG, is hazy over FPI tax, only God can help D-St!

NEW DELHI: Ever since the retro-tax trauma, Dalal Street has come to relate the Union Budget with some tweaking of taxes that can hurt or help equity investors.

Foreign portfolio investors have taken the experience more seriously than anyone else and learnt to be once bitter, twice shy.

Prime Minister Narendra Modi himself fuelled such fears in the runup to the Union Budget, by openly asking people who make money from the equity market to pay more taxes.


While the average equity investor read signs of a return of the long-term capital gains tax, FPIs quickly developed cold feet, wary as they have been of a weakening rupee cutting into their profits even as they began responding to the changed dynamics of the financial world, following tightening by the UD Fed and Donald Trump assuming US presidency.

The recent FPI outflow from India had some bit that was in line with the outflow seen from other emerging markets, while some bit had to do with a surge in the dollar and some fuelled by the confusion over long-term capital gains (LTCG) tax.

Analysts say if the LTCG is indeed brought back, it is going to send the benchmark equity indices tumbling. One analyst projected at least a 15 per cent correction in the market in such a scenario.

January was the fourth consecutive month when foreign portfolio investors have dumped domestic stocks. They sold Rs 33,000 crore worth of stocks in the domestic market.

Domestic institutional investors have played saviour all this while and kept the domestic stock market afloat. They pumped in some Rs 40,000-odd crore into domestic equities over the past five months, which helped somewhat cushion the downward pressure due to the FPI selloff. DIIs have been putting such large bets on domestic equities despite the delay in earnings revival.

“Around Christmas I projected a 10-15 per cent correction over the next four-five months as a base case scenario. I fear such a correction unless the Budget gives FPIs an assurance on their tax standing. The December 21 CBDT circular said FPIs who have more than 50 per cent of assets in India will get taxed over here. While that circular was put in abeyance last week, FPIs expect some decision in the Budget,” said Saurabh Mukherjea of Ambit Capital told ETNow.

Mukherjea expects some repercussions, if the decision is not to the liking of the FPIs. He said his clients are quite worried about it.

Ajay Tyagi, EVP & Fund Manager for Equities at UTI Mutual Fund, said the market was not ready for a rise in the tax structure.

He noted how Prime Minister Modi’s remark on low capital gains taxation in India haunted the market and forced Finance Minister Arun Jaitley to immediately issue an clarification.

“If there were to be any incidence of either long-term or short-term capital gains tax being introduced at a higher rate, I am sure that will completely spook the market,” Tyagi said.

Mukherjea said DIIs were the force that pushed the market higher over the past 12 months. “But that power might crack, if the assault on the economy continues.”

“Three moving parts –tax structure for FPIs, Trump’s own Budget and what happens back home around the black money crackdown – will ultimately have a bearing on economic growth and on the domestic investor sentiment,” the Ambit Capital analyst said.

Foreign investors would be looking forward to the Union Budget with their fingers crossed.

There are also fears that the domestic anti-avoidance law could prevail over treaty benefits in the event of any dispute under the Singapore and Mauritius treaties, which could threaten the lower tax rate for FPIs in the two years between April 1, 2017 and March 31, 2019.