Heavy selling by foreign institutional investors triggered a collapse of the Nifty and Sensex on Budget day. The indices were responding to a clause in the Finance Bill, presented with the Budget, stipulating explicitly that the tax residency certificate (TRC) issued by Mauritian authorities is not in itself a sufficient condition to claim tax benefits on investment profits in India.
The Nifty closed at 5,693, down 104 points, while the Sensex closed at 18,862, down 291 points.
The explanatory memorandum accompanying the Finance Bill of last year too had specified so. However, FIIs took comfort from the fact that there was no explicit provision in the Bill of 2012. This alone would have made it legal for the IT authorities to deny the tax benefit under the Double Taxation Avoidance Agreement with the Mauritius. With the incorporation of such an explanation in the Finance Bill an impediment to going beyond the TRC has thus been eliminated .
FIIs were net sellers of equity worth Rs 1,318 crore, while domestic institutional investors bought net equity worth Rs 418 crore. Retail investors on the BSE were also net sellers of equity worth Rs 143 crore.
“Being the last full-fledged budget before general elections, one did not expect controversy to be raised on FII and Mauritius from an astute and an experienced Finance Minister, immediately after the fiasco on GAAR. This caused panic and led to the sharp fall,” said Arun Kejriwal, Founder –KRIS Research.
Experts were also astonished that investors taking delivery of stocks were not rewarded. The Budget did not reduce the Securities Transaction Tax payable on transactions involving physical delivery.
If the idea was to boost delivery volumes, which the Finance Minister was concerned about, keeping the tax rate as before is a shocker, said Kejriwal.
Volatility was down 8.44 per cent and the volatility index India Vix closed at 14.86.
All the indices, barring the CNX IT, BSE IT and the BSE Teck, closed in the red.