The amendment to India-Mauritius tax treaty has spooked some foreign investors and triggered sell-off in Indian equities.

Speaking to Bloomberg TV India , Andrew Holland, CEO, Ambit Investment Advisory, says FIIs need more clarity on the new rules. P-Notes will be the most affected by it, he said.

What’s you thoughts on the amendment to the India-Mauritius 1983 double-taxation avoidance treaty?

I feel there is still a bit more clarity needed. But the concerns are for the Participatory Note (P-Note) issuers because the tax implications are appallingly higher for them. I am working out whether the tax —short- or long-term — is going to be difficult for them. We also have to look at the arbitrage, especially whether the cash side of the arbitrage is now going to be taxed in the short term. So these are the things which we still need to think through. We actually think foreign investors are long-term investors. But that is obviously not the case. We hedge a lot and this could also have an impact. But if you think of the tax implications, there should not be any long-term capital gains. I think this is a prelude to introduction of capital gains tax or may be the period of holding might be extended. In debt the short-term capital gains tax is three years. If you want to bring the tax, this is one of the ways to do it. I think the markets will probably just want a bit more clarity on this. But I think overall it wasn’t expected and therefore it would be seen as negative and create confusion.

Talking about FIIs, the tax treatment is completely discriminatory. An Indian staying in India pays 30 per cent on short-term capital gains. If I went abroad and lived 181 days in a foreign country, found a sub-account with an FII and put the money back in India, I pay zero short-term capital gains. At some point, should the government look at closing a loophole?

In that respect, I completely agree with you. There is nothing wrong with that. I am just saying that we’re taking the view that FIIs are long-term investors and it will always hold for more than one year. That’s not the case. There’s always a lot of hedging instruments as well. So this will affect how they operate in India and how they think about India. The P-Notes will be the most affected by it.

What happens if I buy an option in the Nifty which is beyond one year? How does that get treated now? And what happens if I have a FCCB or a convertible bond that converts after April 2017? What is the treatment for these two kinds of instruments, which basically change structure after April 2017?

I think it (DTAA) actually talks about shares and that’s where I need a bit more clarity. Does the share mean underlying derivatives as well? I’m sure it must be. So, holding an option for more than a year would be, to my mind, a derivative as well. When you convert FCCB into share, then will it be taxed? And that’s when you go back to short’- or long-term capital gains after you convert it to share.

Does this mean that FIIs will possibly look for other ways or other routes to invest now? Will there be some amount of restructuring in that sense?

I think we just need a little more clarity on how the taxation, especially on derivatives, is going to play out on this. And then FIIs will take a call. But I would have thought that it could be the P-Notes, which is the most at risk in this scenario. FIIs could use the other hedging options such as the Nifty SGX in Singapore, although that’s not a great hedge; that’s what they could do. So I think I will not be overly negative. It’s fine if it is long-term and if you want to stay with anyone else based in India, that’s fine to me. But they just introduced it overnight and so there is not much clarity on how this is going to work. I think that’s where FIIs get spooked a little bit.

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