Sensex, Rupee on the MAT Amid Sustained Capital Outflows
The BSE Sensex dropped over 750 points in intraday trade on Wednesday, its biggest fall since January 6 this year, when the Sensex had plunged over 900 points on global triggers. The Nifty is now firmly below the 200 day moving average, and there’s a big chance that it will break 8,000, traders say.
After months, bears now seem to have an upper hand in stock markets. The rupee has also come under pressure. On Thursday, it hit 64 per dollar, a level not seen since September 2013.
Experts have assigned various reasons for the selloff. Corporate profits are down for the fourth straight quarter, concerns about rural incomes and inflation in case of a deficient monsoon, and a rebound in crude oil prices.
But the biggest reason for the 8 per cent correction in the Sensex and Nifty since April 15 is persistent selling by foreign institutional investors, analysts say. FIIs have sold shares in the cash market virtually every day since April 15, leading to an outflow of nearly $2 billion over 15 sessions (barring the Sun Pharma-Daiichi deal), because of the uncertainty around Minimum Alternate Tax that many foreign fund managers have been asked to pay for capital gains made during previous years.
News about MAT on FIIs had been floating for months, but it was only in mid-April that Finance Minister Arun Jaitley quantified the tax demand as Rs 40,000 crore.
Once the selling began, the government turned defensive and started issuing clarifications. It first said MAT would not apply to investors that operate from countries with which India has a double taxation avoidance treat. The finance ministry later said only 68 tax notices have been issued, with a total tax demand of Rs 600 crore.
Mr Jaitley last month exempted income from securities transactions, royalties and technical service from MAT, offering tax relief to foreign investors.
But the government did not provide any relief for the past period, which means the MAT uncertainty continues. Among market participants, there’s near unanimity that the finance ministry botched up on MAT issue despite Mr Jaitley’s promise of non-adversarial tax regime.
Former Morgan Stanley veteran Sridhar Sivaram told NDTV last week that the government’s decision to levy MAT retrospectively on FIIs poses a hindrance to foreign fund flow into the country.
“I don’t know what the government thinks FIIs are sitting on some tree with money that they can just send it across to India for tax for some previous years. It doesn’t work like that, these are funds that have NAVs (net asset value) on a daily basis and there are investors who come in and go out. So if there’s a tax liability it should have been told upfront at that point of time,” Mr Sivaram said.
