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Foreign institutional investors have welcomed the Finance Ministry’s clarification on the tax residency certificate issue.
The Ministry on Friday clarified that it would not question the validity of Tax Residency Certificates (TRCs) held by FIIs and noted that the current Double Taxation Avoidance Agreement (DTAA) with Mauritius would remain in effect, pending continued talks. This statement, issued in response to markets heading into a tailspin after the Budget on Thursday, said: “TRC shall be necessary but not a sufficient condition” to take advantage of DTAAs.
“Today's clarification is in line with the Finance Minister's statements earlier about GAAR and is clearly positive. It also clarifies that the intention was not to question the tax residency certificate,” said Ramanathan K, Executive Director and Chief Investment Officer, ING Investment Management India. Tax authorities have so far considered these certificates as enough proof to allow foreign investors registered in countries with these treaties to avoid paying taxes in India.After pulling out about Rs 1,275 crore on Thursday, they turned net buyers to the tune of Rs 627 crore today.
The Sensex, which fell by 291 points after the Budget on Thursday, recovered mildly on Friday and closed up by about 57 points or 0.30 per cent.
“The statement today clarified the intent and highlighted that the tax residency certificate remains valid for treaty benefits. These comments have reassured investors and provided the continuity on taxation-related matters in the near term,” said Kapil Seth, Head, HSBC Securities Services, India.
However, some domestic analysts believe that there is still a long way to go for FII confidence to be back.
Sailav Kaji, Director — Institutional Equities & Chief Strategist, Padmakshi Financial Services, said: “The markers have taken the clarification as positive but ambiguity still remains over the grey areas in the language of the statement on TRCs. Unless there is a change in the language of the statement on TRCs’s grey areas, misinterpretation would continue to remain. So FIIs would continue to remain sceptical and wait and watch to see if the statement is removed in its entirety.”
Manisha.jha@thehindu.co.in
raghavendrarao.k@thehindu.co.in
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