|FII versus FDI|
|Tuesday, 08 May 2012 00:07|
FM makes it clear, FII support is enough
Given the tough budget constraint he faces, along with the formidable challenges posed by the high current account deficit and the falling rupee, it was always obvious finance minister Pranab Mukherjee would opt for FII in preference to FDI. While the tax loss due to tax benefits due to treaties such as the Indo-Mauritius one is put at $600 million a year, the tax loss on Vodafone alone, were the FM to give up the demand, would have been upwards of $5 billion, the total including others like SABMiller and AT&T would have been $7.5 billion. Which is why almost all the amendments to the Finance Bill announced by the finance minister on Monday related to FIIs and almost none to FDI—tax demands on Vodafone and others remain unchanged. Not surprisingly, the markets reacted with joy and rose 400 points from the day’s low and just under 300 points from the day’s opening. At 16,913, the Sensex is still below the 17,656 levels before the Budget, but had it not been for the global bloodbath following the electoral results in France and Greece, the market may even have made up for all the post-Budget loss.
Apart from postponing the implementation of GAAR by a year, the markets were also thrilled by other safeguards put in. The onus of proving a transaction was a sham transaction will now lie on the taxman and not on the taxpayer; a joint secretary in the law ministry will be part of a panel which will decide if GAAR is to be invoked and, more important, in case a taxpayer has any doubt about whether it attracts GAAR, it can apply to the Authority for Advance Ruling. In other words, FIIs coming in from Mauritius or Singapore, for instance, will get another year during which they can figure out how to restructure their operations. Tax concessions have been extended to private equity investors (long-term tax rates for them have been halved, to FII levels), unlisted firms have also been given concessions. And though bullion is a big source of generating and consuming black money, jewellers got a huge tax concession—the threshold level for cash purchases of jewellery has been raised to R5 lakh, excise duty has been abolished for unbranded jewellery (branded jewellery also got saved thanks to this!). The only problem with the excessive focus on FII and the relative neglect of FDI is that, with the exception of FY11, FDI has been much larger than FII—$41.9 billion versus $18 billion in Apr-Feb FY12—and it also represents more permanent money. So Monday’s stock market recovery is likely to be a passing phase.