Nifty ends below 5200, Sensex loses 309 pts; Re @ 51.42/USD
The market ended at two-month low. The BSE benchmark fell 308.96 points or 1.78% to close at 17,052.78, with all 30 stocks closing in the red. The NSE benchmark closed down 93.95 points or 1.78% at 5,184.25, underperforming global peers. European markets were moderately higher.
The Indian rupee depreciated by 25 paise to 51.42 a dollar while 8.79% 2012 yield rose by 0.05 to 8.42 ahead of announcement of government's market borrowing calendar for first half of FY 2013 this week.
According to Ambareesh Baliga of Way2wealth, the market is surely worried due to some of promissory-notes selling and some sort of advance selling by local investors.
With new General Anti-Avoidance Rules (GAAR) coming into effect from April 1, which will make P-Note based transactions taxable, the market saw widedpread selling by foreign institutional investors. Foreign institutional investors (FIIs), including Mauritius based FIIs, will need to revaluate all PNs/ offshore derivative instruments now.
Baliga further said, the market could break most important 200 day moving average at about 5170 and could look at levels of about 5000-5050.
All sectoral indices closed in the red; the BSE Realty hit quite badly, falling 3.6%. Power, Bank, Metal, Oil & Gas and Capital Goods indices were down 1.8-2.6%.
ICICI Bank, country's largest private sector lender plunged 4.3% while rivals State Bank of India and HDFC Bank fell 1-2%. Housing finance company HDFC slipped 1.5%.
Oil & gas producers and index heavyweights Reliance Industries and ONGC dropped 2% each. Engineering and construction major Larsen & Toubro was down 1.77% and state-run Bharat Heavy Electricals lost 3%.
Tata Consultancy Services and Infosys, India's top software service exporters were down 1.7% while telecom player Bharti Airtel tumbled 2.3%.
NTPC, country's largest power generation company and Tata Power, No. 1 private power producer plummeted over 3.5%.
Shares of Bajaj Auto, Sterlite, Cipla and DLF among other largecaps tanked 3.5-4%.
However, Kotak Mahindra Bank rose 1% post block deal. Warburg Pincus sold 2.65 crore shares at Rs 530 a share on BSE via block deal.
Jaiprakash Associates outperformed other infrastructure stocks, rising 3% after the company received two contracts worth Rs 913 crore.
In the second line shares, Indiabulls Real Estate and HDIL plunged 6-7% after cash strapped Maharashtra government proposed to hike stamp duty on leave-license to 0.1% on market value or 1% of the average annual rent or deposit paid, whichever is higher, for residential properties. For commercial properties, the duty proposed is 0.4% for lease agreements over 60 months. This is a whopping 160 times hike from the previous fixed amount of Rs 25,000 for residential and Rs 50,000 for commercial properties for 60 months.
EIH Associated Hotel shot up 6% amid heavy volume as the company will consider rights issue and merger of company's wholly owned unit, Maharaj with itself.
Manappuram Finance crashed 11% today, which had fallen 20% last week after the RBI tightened rules for gold financing companies
About two shares declined for every share gaining on the BSE. The BSE Midcap and Smallcap indices were down 1.4-1.6%.
Taxman's GAAR spooks mkt: Mauritius invsts under threat?
The tax department is all set to tighten the noose around foreign investors who have been investing through shell companies in tax havens. CNBC-TV18 learns that the I-T dept will ask FIIs and foreign investors to file tax residency certificates if they are situated in a country with which India has a DTAA.
Legal experts say all forms of investment from Mauritius will now come under the scanner. Tax lawyers add that the taxman may eventually start going beyond just the tax residence certificate.
Moreover, the confusion over general anti-avoidance rules (GAAR) spooked the markets. (Read here )
Mukesh Butani, chairman at BMR Advisors believes to some extent the SC verdict in Azadi Bachao Andolan case, which was rendered on the back of a government circular of 2000, gets diluted. He says now that applies to all forms of investment that comes from Mauritius, be it an FII or FDI route.
"If the participatory note is in relation to an underlined asset i.e. part of the investments into an Indian company and that would be taxed, then that's a far-fetched argument," he says.
Corporate tax lawyer HP Ranina says the fear is that the tax authorities will not go only by the Tax Residency Certificates issued by Mauritius and therefore they will go into what they call the "Commercial Substance".
"The company will be deemed to be resident in Mauritius only if it has commercial substance in that country.
And not if it has just set up office in a lawyer's outfit with no employees and no other business activity. So, in that case, they will not apply the treaty and therefore the exemption which currently they enjoy from capital gains will not be applicable," he told CNBC-TV18 in an interview.
Market experts warn that unless there is clarity on the exact details of the GAAR guidelines, the markets may see more pain.
"This has been made very clear by the government as a general principle that India will not allow the use of tax havens - where this is used as a tax saving route or tax evasion route. So definitely harassment by tax department cannot be ruled out. The clarification given just now by the government that tax residency will be sufficient for claiming the exemption, that should suffice," investment analyst SP Tulsian told the channel.
However, Ambareesh Baliga, COO of Way2Wealth Brokers feels, if it is very clear that it is only prospective, then this may not be too much of an issue. "The fear of it being retrospective, then invest climate will get visited, and downtrend nervousness will continue for a while longer," he explained.
Q: There is a lack of clarity on exact modalities on the entire issue. Can you throw some light on what kind of implications it could have?
Butani: General Anti-Avoidance was on anticipated lines. GAAR is a replica of the last draft that the government had brought out in the 2010 amendment bill.
The only difference is that, it's being legislated from 1st April 2012 rather than 1st April 2013, which coincides with the provisions of the DTC.
The last draft that the government came out did not announce the guidance with respect to and the circumstances under which the General Anti-Avoidance law will be invoked.
Guidance will also have checks and balances which the accessing officer and the commissioner will have to keep in mind before invoking GAAR. The fact that they have fast-forwarded the GAAR to 1st April 2012 there has been no change.
Q: Investments or profits made through participatory notes will be subject to tax and even investments routed through companies in Mauritius probably will be taxed, is there any reason to believe that these kinds of investments will be subject to short-term and long-term capital gains tax in India?
Butani: There is some anxiety as far as Mauritius issue is concerned. The amendment that has been brought in this Budget, which is applicable from 1st April 2012, states that a Tax Residency Certificate is an essential document, but not a conclusive proof.
The Supreme Court verdict in Azadi Bachao Andolan case, which was rendered on the back of a government circular of 2000 to some extend, gets diluted.
Now, that applies to all forms of investment that comes from Mauritius, whether it's an FII or an FDI route. Tax authorities will have a right to investigate into and go beyond the tax residency certificate i.e. the merits of the Mauritian structure and question the bases. And if a need arises disallow the benefit. That is very independent of the general anti-avoidance. The larger sentiment in the market could be driven by a combination of the two questions that you raised.
Q: Is there an element of confusion in the participatory note route?
Butani: Now you are talking about an amendment, which is in relation to Vodafone verdict, which talks about the underlying asset that would be a very strict interpretation. What you are saying suggests that, if the participatory note is in relation to an underlying asset i.e. part of the investments into an Indian company and that that would be taxed then that's a far-fetched argument. I need to read the code and then come to the conclusion that indeed is the issue.
Q: Does the market fear that stock bought via P-notes could be subject to tax?
Butani: There are several issues when it comes to divestment in a stock exchange in India. There are clear guidelines that suggest that such income is not liable to tax or is liable to tax under the capital gains provision.
Many of the FIIs had been structured through Mauritius and there is a greater degree of reliance on the Mauritius treaty. Combination of retrospective amendments, strict source-based rules, amendments dating back to 1962, general anti-avoidance provision and the added restriction on Mauritius treaty all adds to an element of nervousness.
The government intends that if there is an investment made in India through the FII route, the government will use a strict source-based rules to tax a part of that income that's seems to be the underlying philosophy of the government.
Nobody can be denied of legitimate change. The manner and the direction of the tax policy is suggestive of the fact that in future the government wants to bring many of these under taxation in India and it's in the process, they want to carry amendments.
Source: www.moneycontrol.com
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