Sensex, Nifty Take A U-turn As PMO, Fin Min Discuss Tax Surcharge On Foreign Investors

Indian market recovered helped by short-covering which pushed the Nifty50 beyond 11000 while the S&P BSE Sensex saw gains of about 200 points on Friday.

The Indian stock market reversed losses in afternoon trade on August 2 after media reports quoting government officials suggested that Prime Minister Office (PMO) and finance ministry’s top bureaucrats are in talks over foreign portfolio investor (FPI) surcharge issue, sources told CNBC-TV18.

The recovery was supported by short-covering which pushed Nifty50 beyond 11,000, while S&P BSE Sensex saw gains of about 200 points during the session.

“Senior officials from revenue, CBDT and MEA met PMO for a possible solution. The PMO has asked DEA to submit representations on issues shared by FPIs earlier,” they say.

Foreign investors were on a selling spree in July after FM Nirmala Sitharaman denied withdrawing super-rich surcharge on FPIs that was proposed during the Budget on July 5.

Foreign investors turned net sellers in the equity market in July, retreating more than Rs 11,000 crore (nearly $2 billion), highest in 2019.

This is also the highest ever outflow since October 2018 when foreign investors pulled out Rs 27,622 crore from India's equity markets, and a little over Rs 10,000 crore from the debt markets, according to the SEBI data.

During her Budget 2019 speech on July 5, Finance Minister Nirmala Sitharaman had proposed levy of an additional surcharge on 'individuals and trusts' earning more than Rs 2 crore and Rs 5 crore, respectively. After the announcement, FPIs began mass exodus from the country.

Meanwhile, Sitharaman during a discussion on the Finance Bill in the Parliament on July 18 suggested that FPIs could consider the option of structuring themselves as companies rather than trusts to avoid paying the increased surcharge.

According to experts, the foreign fund exodus in July was largely driven by two factors – a) higher tax surcharge, b) slowdown in economic growth. They feel that the sell-off is likely to continue in the near future as well if no policy adjustment is made.

The dollar returns are not sufficient enough to make India an attractive investment destination. Also, a majority of other developing countries or emerging markets do not have stringent tax rules, say experts.

“We may see outflows that can further extend. Since few concerns are mounting at present. The latest move by the government is going to affect many FPIs that are registered as trusts. This is almost more than 38 percent of the total FPI registered in the country,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.

“Secondly, it is very much true that earnings in terms of dollars are low. While if we talk about the Sensex, it is still very much at the same levels what it was in 2008 high and so is Nifty,” he said.