Foreign portfolio investors (FPIs) will likely wait and watch, as the government readies its case before the Supreme Court hearing on the applicability of tax on these foreign investors.
Since Indian stock markets rely to a large extent on inflows from FPIs, limited participation from foreign investors in the coming days could add to the uncertainity of corporate earnings, which may also impact the markets, brokers and tax experts said.
A panel headed by Justice AP Shah to examine the issue of levying minimum alternate tax (MAT) on FPIs, submitted its report to the government last week. MAT is a kind of tax levied on the capital gains made by FIIs.
The government has to take a decision based on the panel’s recommendations and present its case at the apex court’s hearing on August 4. The hearing is on the Castleton case.
In the 2015 Budget, finance minister Arun Jaitley proposed exempting FPIs from MAT beginning April 1, 2015. This sparked off interpretations on the tax being levied for the past years, creating uncertainity and prompting many foreign investors to pull out from India.
“One hopes that there will be clarification that MAT was not meant to apply to FIIs for the past years, based on which all the litigation can be resolved,” said PwC India partner Sunil Gidwani, who advises foreign investors.
Nilesh Shah, MD of Kotak AMC said the immediate impact on markets may not be very distinct. “If the (panel) report opines that MAT is applicable then expect 5-10% correction.”
FIIs were behind the 30% rise in markets in 2014 and have been buying mostly in 2015.