Market takes Mauritius tax agreement in its stride

P-notes will get impacted but no sweat for markets

Fears of removal of tax benefits on investments from Mauritius adversely affecting Dalal Street remained unfounded on Wednesday.

The BSE Sensex, after dropping 360 points on opening, or 1.4 per cent, recouped most of its losses to settle 175 points, or 0.7 per cent, lower at 25,597.

Experts said the stock market took the development in its stride because of prudent implementation by the government. Legal experts welcomed the government’s decision to apply the tax a year down the line and the concessional tax rate for the next two financial years.

“These provided certainty to investors, who have been nervous about the future of the Mauritius treaty,” said Mukesh Butani, managing partner, BMR Legal.

Equity assets of Mauritius-based investors at the end of March were valued at Rs 3.78 lakh crore, 20 per cent of the overall foreign portfolio investors (FPIs)’s equity assets of Rs 19 lakh crore. FPI on Wednesday were moderate net sellers at Rs 362 crore, provisional data by exchanges showed.

The amended tax treaty will, however, hurt participatory note investments due to operational issues surrounding taxation.

“The costs of taxation will have to be built into such arrangements. This will make such arrangements less lucrative for investors who seek synthetic exposure to Indian securities,” said legal firm J Sagar Associates in a note.

Equity assets under participatory notes were Rs 2.23 lakh crore, nearly 12 per cent of the total FPI holdings at the end of March. At its peak, participatory notes accounted for around 40 per cent of foreign funds entering the Indian stock market.

Around 30 per cent of investments through participatory notes are channeled through Mauritius and another 30 per cent come through Singapore, with which a Mauritius-like tax treaty is in the works.

“Informed investors may now prefer registration and participatory notes may no longer be appealing,” said Pranay Bhatia, partner, direct tax, BDO India.

The Securities and Exchange Board of India introduced new regulations in 2014 to ease entry of foreign investors. In 2015-16, the FPI count had more than doubled to 3,992 from 1,444 at the end of 2014-15.

“Short-term investors may not have active hurdle rates, but can see their returns fall. The increased taxation should not deter investments meaningfully. India structurally continues to offer opportunities well ahead of the cost of capital,” said Sanjay Mookim, India Equity Strategist, Bank of America Merrill Lynch.