The finance minister in his opening remarks in the budget speech said that attractive foreign investment was an imperative and India needs to encourage foreign investment which is consistent with the country’s economic objectives.

Yet by the end of his speech, P Chidambaram did not manage to give any strong positive signals to the foreign investors. Interestingly, while the benchmark stock market index slid 1.5 per cent post budget, foreign institutional investors (FIIs) were net buyers on Thursday and recorded net inflow of over $500 million, the highest in the past three weeks.

The fine lines of the finance bill, which the FM did not announce during the budget speech but made heads turn, is the fact that holding a tax residency certificate (TRC) alone is not sufficient to claim double tax avoidance agreement benefits by the foreign investor. The document says TRC is necessary but not a sufficient document to claim any relief, thus putting a question mark on how the tax assessing officers will decide who should not be given relief under TRC. The change comes with retrospective effect from calendar year 2012.

India at present enjoys tax treaties with countries like Mauritius, Cayman Islands, Singapore and close to other 80 countries across the world.

In another critical move, the FM said he intends to implement an international standard for classifying FII and foreign direct investment (FDI) wherein those investors holding over 10 per cent stake in a company would be classified as FDI and those up to 10 per cent would be FIIs.

Sujan Hajra, chief economist, AnandRathi Financial Services, said: “The budget is unlikely to please the foreign investors, as the classification of FDI and FII is only for the purpose of business income. Even for the companies with the resident status, overall drift is disappointing. NSE already has the debt trading market, but the number of players are limited. The securitisation might help the NBFCs, but (its) not a major positive. Since the time the pass through certificate (PTC) came in June last year, the clarification on tax was expected.”

Kirti Shah, partner-corporate finance at BDO Consulting Pvt Ltd, said, “The finance minister wants to implement a universal model by categorising investments for over 10 per cent stake as long term foreign investors in a business. We are differentiating them from investors who are coming to India just because of the sentiment. They are also streamlining various investors coming through routes like FII, FDI and QIB routes under one window.”

According to Mukesh Butani, chairman, BMR Advisors, “The classification is positive for the capital markets as the government wants to increase institutional investments to meet current account deficit.”

However, the TRC issue remains a niggling factor. It comes at a time a year after former finance minister Pranab Mukherjee proposed to introduce general anti avoidance rule (GAAR). After heavy selloff and pressure from international investor community, GAAR implementation was rolled back and has now been slotted for implementation with changes from 2016.

Interestingly, when GAAR was announced it was said that the investors would be taxed on retrospective basis, but the Supreme Court had ruled against the same. Also the fact that the clause of ‘TRC is necessary but not sufficient’ and has been brought back in the statute has rattled the investors community.

But a section of the tax and advisory community is keeping their fingers crossed and waiting for finance minister’s press conference tomorrow for clarifications on the same.

Rikesh Parikh vice president – Equities at Motilal Oswal Securities Ltd, said, “Amendment made to Sec 90 & 90A pertaining to DTA indicating submission of residency certificate would not be sufficient condition for claiming benefit brought the scare of GAAR among institutional investor.”

Apart from these, the finance minister has marginally cut the securities transaction tax for certain categories of investments. However, these were seen as too marginal to make any big positive impact.

Meanwhile, the government is also considering moves to strengthen the capital market regulator. Sandeep Parekh founder of Finsec Law Advisors, said, “The proposal to amend the SEBI Act to strengthen the regulator is a good move. The proposal to simplify the procedures is also straight forward and would make it easy for FII to register with SEBI, which would otherwise take around six weeks.”

(Edited by Prem Udayabhanu)

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