Indian shares fell on Wednesday on concerns the government may amend tax treaties with countries, including Singapore, after it agreed to tax capital gains on foreign investments from Mauritius.
The tax, which will be effective April 2017, would be at 50 per cent of the domestic rate for two years, and at the full rate thereafter, the government had said on Tuesday.
Shares took a beating, losing more than 1 per cent earlier in the day, also on worries about the tax impact on holders of popular derivatives that track Indian equities, which are sold to foreign investors.
The participatory notes, as they are known, account for a substantial part of equity inflows and most are bought by investors based in Mauritius or Singapore, analysts said.
Shares however trimmed losses from earlier in the day as investors took comfort after clarity emerged that the tax would not apply to existing holdings.
The broader NSE index closed down by 38.95 points or 0.43 per cent at 7,853.21. It earlier dropped as much as 1.35 per cent.
The benchmark BSE index ended the session lower by 175.51 points or 0.68 per cent at 25,597.02. It lost as much as 1.4 per cent earlier in the day.
All BSE sectoral indices ended in the red. Among them, PSU index fell the most by 0.98 per cent, realty 0.88 per cent, power 0.75 per cent and IT 0.72 per cent.
Major Sensex losers were Bharti Airtel (-2.55%), State Bank of India (-2.3%), Tata Motors (-2.26%), Dr Reddy's (-2.02%) and BHEL (-1.87%), while the top five gainers were Axis Bank (+2.16%), Maruti (+1.12%), Asian Paints (+0.97%), L&T (+0.41%) and Tata Steel (+0.32%).
Strong economic fundamentals
Meanwhile, trying to calm markets, the Finance Ministry on Wednesday expressed optimism that India will continue to attract investments due to its strong economic fundamentals and the returns it offers to investors.
“India continues to be a robust economy and investments will come in because of fundamentals of the economy and because of the strength and resilience of the economy and returns that India offers post tax,” said Economic Affairs Secretary Shaktikanta Das.
India-Singapore treaty
India and Singapore will need to renegotiate their own double tax-exemption treaty, as rules say that any changes to the capital gains exemption clause in the treaty with Mauritius would also lead to changes in the agreement with Singapore.
“The good thing about this tax treaty is that it's not retrospective in terms of the applicability of the taxes and this is what has assuaged negative sentiment in the market," said Mahantesh Sabarad, deputy vice-president of research at SBI Capital Securities.
“However, market is waiting to understand whether similar treaties existing elsewhere will be revised or not.”
FDI inflows from Mauritius
Mauritius has accounted for a third of the $278 billion in foreign equity investments into India since 2000.
Nonetheless, analysts said foreign investors would need a period of adjustment as they consider their options.
“The announcement concerning the Mauritius-India treaty has likely affected the sentiment in the stock markets because of significant foreign fund flows into India from the country," said Bernard Aw, market strategist at IG in Singapore.
Global markets
The dollar fell on Wednesday, succumbing to a bout of profit-taking after hitting a two-week high the previous day, while European stocks also put a positive start to the week behind them to trade in the red.
Weak corporate earnings weighed on stocks, as Germany's DAX snapped a four-day winning streak and the broader FTSEuroFirst 300 index of leading European shares erased much of Tuesday's rise, which was the biggest in three weeks.
A report by SMC Global said: "Asian stocks pulled away from eight-week lows, a day after solid corporate earnings sparked a rally in global equities while the yen struggled amid intervention warnings from Tokyo in the wake of the currency's rapid rise. US stocks surged to their biggest gain in two months Tuesday after the Chinese government moved to stimulate the world's second-largest economy.US wholesale inventories inched up by 0.1 per cent in March after falling by a revised 0.6 per cent in February. Economists had expected inventories to rise by about 0.3 per cent compared to the 0.5 per cent drop originally reported for the previous month."