Finance minister Pranab Mukherjee on Friday said that persons investing in Indian stock markets through participatory notes (P-Notes) will not be taxed.
The statement lifted investor sentiments and snapped a two-day fall in the Bombay Stock Exchange(BSE) benchmark Sensex that shot up by 346 points or 2.0% to close at 17,404.2 buoyed by fresh buying by foreign funds. The NSE 50-issue index Nifty also surged 116.7 points or 2.3% to 5,295.6.
Banking stocks rose sharply on value buying after recent sell-offs. State Bank of India jumped up by 1.6%, ICICI Bank rose 3.6% and HDFC Bank jumped 1.8%.
Participatory notes (PNs) or P-notes as they are called in market parlance, are offshore derivative instruments issued by foreign broking houses to overseas investors, who want an exposure to the Indian capital market without registering with marketing regulator Securities Exchange Board of India (SEBI).
The foreign broking house buys the shares on behalf of the overseas investor and issues it P-notes, with the shares being the underlying.
The shares are held by the foreign brokerage’s custodian, on behalf of the P-note holder. When the investor holding the P-notes want to sell the shares, he gives instructions to the foreign brokerage, which then sells the shares.
"Indian tax authority would not go beyond financial investor (FIIs) to check the details about the P-Note holders," Mukherjee said. "Accordingly, a question of liability for tax in India of the P-Note holder would not arise. Necessary clarification will be issued."
"I would like to categorically clarify that the intention of the government is is not to cause any harassment to genuine investors," Mukherjee said.
In the Budget for 2012-13, Mukherjee has proposed a General Anti Avoidance Rule (GAAR) "to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel".
"Keeping in view the aggressive tax planning with the use of sophisticated structures, there is a need for statutory provisions so as to codify the doctrine of "substance over form" where the real intention of the parties are taken into account for determining tax consequences.
The move had spooked markets that had fallen sharply over the last two days triggering concerns that all short-term capital gains made by foreign institutional investors (FIIs) and P-Notes will be taxed.